Overcapacity in China: do we really know what is happening in China?
If 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:
- “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”
- “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”.
- “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%.
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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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