EDITOR: | March 2nd, 2016 | 10 Comments

Overcapacity in China: do we really know what is happening in China?

| March 02, 2016 | 10 Comments
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iStock_000072877673_LargeIf it can happen to steel, oil, cement – why can’t it happen with lithium, graphite, rare earths; in fact, to any tech metal?

In my Australian newspaper column this week, I made a brief reference to a 56-page report from the Beijing-based European Union Chamber of Commerce in China, entitled Overcapacity in China. It mainly concerned a handful of major items – all the above mentioned plus aluminium and glass. (By the way, I am surprised the report has not received more attention as it does ring alarm bells about the state of China – and whether we know what is going on there.)

But, on further reflection, if such dislocations can occur in the sectors the chamber investigated, then why it can’t happen in those sectors with which InvestorIntel concerns itself. Why might not there be misallocations in rare earths (where 90% of enterprises are losing money – an indication that something is not right, and it may be more than just the illegal production undermining the market), or in lithium or graphene enterprises? After all, in reference to the chemical industry (which is relevant to our concerns) the chamber made the point that China has 25,000 chemical companies, many producing the same products, and fighting for a finite number of customers.

Of course we cannot know everything about what is happening inside China at this stage, but consider some of the stark findings from the chamber’s report:

  1. “In just two years – 2011 and 2012 – China produced as much cement as did the US during the entire 20th century”. And this: “In 2015, China’s cement production accounted for 57% of global output and was about nine times larger than the second largest producer, India”
  2. “Steel production has become untethered from real market demand and is now more than double the combined production of the four next leading producers: Japan, India, the US and Russia”.
  3. “In China’s aluminium industry, 60 per cent of production has negative cash flow”.

With cement, capacity has risen from 1.87 billion tonnes a year in 2008 to 3.1 billion tonnes in 2014. But with the latter figure, China produced 2.25 billion tonnes of cement, meaning that 27% of its industrial capacity in this sector was lying idle.

How about oil refining? Well in 2008 capacity was at 391 million tonnes a year; in 2014 it was 686 million tonnes, but production was “just” 456 million tonnes – a utilization rate of 66%.

Flat glass is just as bad. In 2014 production capacity was at 1.04 billion weight cases a year compared to production of 831 million. That means nearly a fifth of glass making capacity is not being used. (Might that have implications for cerium?)

So, again with the question: has this level of misallocation occurred elsewhere? Are there any so far unknown developments that, at some future stage, could disrupt any of the tech metals markets in which we are interested?

I have long made the point that so much of the world’s commodity demand now depends on a market which, at best, is opaque.

Here’s another concern. The Dow Tuesday rose 349 points, this at the same time as some worrying economic data came out of China. China’s official manufacturing Purchasing Managers’ Index [PMI] for February came in at 49, below January’s 49.4 level. The Caixin manufacturing PMI at 48 was below the expected 48.4. The services PMI at 52.7 fell from 53.5 a month earlier – and haven’t we all been told that China is successfully making the transition to a services economy?

The Dow, and metal prices generally, were helped by better manufacturing PMI data from Europe; and construction spending in the US was all very positive.

But, sorry, I am thinking about that overcapacity – and where else it might be lurking.


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Comments

  • Tim Ainsworth

    Dudley Kingsnorth please post your 2015 Chinese RE supply/demand data here and provide some solid foundation to this discussion.

    Chinese domestic demand clearly peaked H2 14 yet producers continued 12 months before reducing supply.

    While China have maintained static production quotas H1 16 they are clearly way out of balance to demand.

    The IMCOA 2015 data clearly establishes the base line and should be in the public domain IMO.

    Frankly naive continual promotion of RE as a single entity.

    March 2, 2016 - 8:11 AM

  • Dr. Mike Hirschberger

    Excellent Robin–and yes, good read. frightening actually

    It is absolutely operand to have the 30,000 ft view. It is clearly needed for almost any Chinese related commodities-which surely includes REE. .

    To start. Witness the humbling of BHP and its Super Cycle Forever thesis. BHP now looks like a 800 lbs lemming running backwards into the abyss with a sign over its neck reading, “I am not a 800 lb Lemming. I am BHP after all”

    Minor metals –how about Sb–last month Twinkling Star -worlds largest Sb producers and >500 years of production history (think about that one) -main smelter shuddered–250 secure jobs gone –Sb metal $5,000 /mt down 80% from peak–and bleeding like suicide vest.

    So, if it can happen to a mrkt like Sb where China had a 80% mrkt shr–why not REE?

    . In witnessing the explosion/implosion of Chinasteel since 2,003–I was once told that the major Chinese Export mills thumb their nose at Beijing and concentrate on the customer at the door to hell with quotas. Pretty entrepreneurial if you think about it. So, I don’t see any of that thinking changing anytime soon–without political unrest-and, do you really think Beijing wants political unrest in the major industries?

    The rub, even if you post an office in Pudong, what do you really know?.. maybe better is to get drunk with a ringading in Myanmar.

    March 2, 2016 - 1:32 PM

  • merlion

    Robin, Chinese New Year was taken over the second week of February. A week of zero production in either the manufacturing or the services sector will skew a serial comparison with January. The better comparison would be versus the two corresponding months of 2015.
    2015 February 19 February 18 – 24
    2016 February 8 February 7 – 13

    “China’s official manufacturing Purchasing Managers’ Index [PMI] for February came in at 49, below January’s 49.4 level. The Caixin manufacturing PMI at 48 was below the expected 48.4. The services PMI at 52.7 fell from 53.5 a month earlier – and haven’t we all been told that China is successfully making the transition to a services economy?”

    March 2, 2016 - 4:58 PM

  • Alex

    I had look for Dadly report from HK Conference at 2006 with predictions 2015 year for RE. They are not correct, so his predictions for 2020 is also not so realable. They think economic will linear grow up or increase more.
    Never concider falling , crisis and deflation scenario.
    There is no demand because economically is cheaper to use oil products then green tecknology. And it is not possible to add Tax for oil and stimulate by dotations green energy too much . When oil have 90% and green energy 10 % is possible but not when 50-50% because economically green energy expensive

    March 3, 2016 - 2:21 AM

  • Tim Ainsworth

    If the subject is Industrial Minerals & Metals anyone watching Iluka & REMX?

    March 3, 2016 - 7:37 AM

  • Investor

    Alex,
    Your words are like a picture to me and people reckon picture is worth 1000 words. You hit the nail on the head.
    Predictions and predictions, but they were not correct. these so called experts were not correct. So why they were wrong? Have they corrected their mistakes when making new predictions…etc.
    The reality is current demand and price!

    March 3, 2016 - 8:43 AM

  • merlion

    As a reflection of the market’s opacity, I have seen Curtin Uni projections with confidence limits of +/- 20%.

    Imagine that, your life expectancy is 75 years but it could also be +20% at 90 years or -20% at 56 years. Actuaries would eat their brains out.

    Or consider this, a VERY average IQ is 100. But with +/- 20% confidence limits it could also be 120 or 80.

    Hmmph!

    March 3, 2016 - 3:46 PM

  • Tim Ainsworth

    merlion, in such an opaque industry we’re looking for trends, not accountants.

    Compiled in consultation with Assoc Chinese RE Industries as recently as Sept 2015 the data is probably as good as we’ll get, and certainly indicative.

    Certainly understand why it wouldn’t suit many, much more comfortable to float on the unsubstantiated opinions that abound, yet just don’t seem to be materialising.

    March 4, 2016 - 2:38 AM

  • Investor

    Like it or not Tim but we all end up being accountants, as long as we can use calculator.

    March 4, 2016 - 3:30 AM

  • Tim Ainsworth

    Lol Investor, so far I’ve resisted the urge, and seem to be living quite well, just don’t tell my Accountant.
    He’s great at tracking where I’ve been, but no idea where I’m going.

    March 4, 2016 - 5:38 AM

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