Daily Management Review

Why it's important to know how much feedstock China has in store


Probability of weaker production of various raw materials, from aluminum to coal, are causing price fluctuations in the global market and are increasing investor concerns.

Demand from China has long been a driving force in the world’s commodity markets. Probable decline in production is causing price fluctuations and is attracting more attention from investors. Last year, the world's second largest economy blew up the coal market by reducing number of working days in mining companies from 330 to 276. This decision led to a 25 percent jump in coal prices.

Given the dominant position of the PRC in the world market, such volatility can spread to other commodities. The country is considered one of the three largest producers of various metals, ranging from aluminum to zinc. China is responsible for 50% of the world's lead production (compared to 19% fifteen years earlier) and approximately 48% of the world's coal production (compared to 32%).

The key problem is that investors often have to speculate about volume of production in China due to significant difficulties in obtaining reliable data relating to the country's raw materials industry. According to analysts, official bodies often overstate production of metals such as copper.

Government data may differ significantly from those obtained by private analytical firms. Campbell Harvey, a finance professor at the Duke University School of Business in Fukua, says: "Collecting production data often reminds detective work. For an astonishingly long time, we have focused on demand and on the growing Chinese economy. Alas, this is only part of the story".  

Investors are looking for alternative sources of information, including satellite imagery. Some analysts track number of excavators in mines and caravans-cabins to predict volume of supplies. Take, for example, Remote Sensing Metrics company. To assess the metal reserves in various countries, including China, the company's experts analyze thousands of black-and-white satellite photographs. Tom Diamond, President of Remote Sensing Metrics says: "This is a hidden world. The company, which is trying to decide how much to invest in a new project, will probably want to know the situation at other deposits and mines".  

News about shipments from China has become a determining factor for investors in commodities. This year, Goldman Sachs analysts forecast a rise in aluminum prices from $ 1,700 to $ 2,000 per tonne after Beijing limited production in the winter months in regions responsible for a fifth of the world's supply. Large mining companies are trying to find out whether the PRC intends to increase production of other raw materials. 

Iron ore is the second-largest commodity in the world in terms of turnover, second only to oil. According to Rio Tinto, in 2016, China's iron ore production fell to 250-275 million tonnes (400 million three years ago). The decline was obliged to a fall in profitability of local mines - the costs here were among the highest in the world.

Rio’s CEO Jean-Sébastien Jacques said that although he is not concerned about state of the Chinese economy, "the main uncertainty is related to extraction of iron ore in the domestic market" and whether the local company will overcome the mark of "300 million tons" per year, given the current price increase. Any large-scale increase in production in the People's Republic of China could hit Rio since iron ore accounts for the bulk of the company's profits.

On the other hand, weak oil production in the PRC can support the global recovery of the energy market. Aging of the fields means that the country, one of the five largest oil producers, may have experienced a peak in production, and its dependence on imported fuel will only grow in the future.

In the next three years, Beijing predicts a decline in oil production in the country by 7% from the level of 2015. Rhetoric of the Chinese government indicates that it does not want large fluctuations in commodity prices. They can lead to emergence of inflationary pressures in the country’s economy itself. Peter Markey, an expert on commodities markets in China and Mongolia at Ernst & Young, says: "If Beijing finds that prices have become too high, it will be able to ease some of the restrictions for its producers. This is an additional tool in the regulators’ arsenal". 

source: theaustralian.com.au