A year & half passed on my own research note on China & how China’s macro plans may impact its own economy, commodity prices & regional countries in short / medium term – which was compiled & issued for select audience.
As I was reflecting on it & how things may unfold hereon, thought of sharing on Linkedin and welcome your comments / views / feedback on it along with your experience on how things unfolded for you since then – and – what you anticipate in short / medium / long term from now.
Thanks for your time.
“Key take aways: As strategy, China will target all Asian / immediate bordering countries for infrastructure development which will off-set internal low demand for various commodities in short term (1 year).
With this very long term strategy in mind, Government will target these nations to dump over-capacity which they have built over years. This essentially means perception of “China is factory for world” will come back in next couple of years. This will give them massive strategic lever against many other large economies in Asian sphere due to prowess of industrial capacity at disposal.
These initiatives will also be partially routed through newly formed Asia Infrastructure Investment Bank (AIIB) headed by KV Kamath & India is partner in the same.
However massive capacity closure / shut-downs announcement across key commodities will have negative impact on above plans because such measures will invite higher refurbishment costs of plant & machinery as well as lower quality of product. This is expected sometime in 2017/ 2018 onwards.
In short-term, Chinese companies will dump commodities at excessively low prices leading to slower Indian & global industrial activity even when consumer get commodities at significantly lower prices with levy of steep anti-dumpting duties.
Tea-pot refineries: these refineries are shaking China’s Oil industry with dedicated quota for importing & exporting. Due to lower sales/ mktg channels, tea-pot refineries may soon be net exporter of oil products – directly & through Sinopec/ CNPC. They have annual quotas to import. Considering year just began, the imports may not be in linear fashion. The export quotas will enable China teapot refiners export refined fuel for 1st time releasing ~20% capacity for global market which may have impact on pricing. This move is expect to add pressures on oil products which are sagging under “excess barrels from mega middle-eastern plants”.
Some internet research suggest there is no limit on how much teapot refineries can ship-out leading to inevitable face-off between large & small refiners & excess supply in Asian market to begin with – however same will be limited due to lack of export infrastructure for these inland refiners. In any case, this needs to be reviewed closely to assess likely direction in which crude will move in spot market from time to time.
Supporting Key Indicators:
The China Govt plans to focus on reducing over-capacity, to begin, start with steel, coal etc. and then in industrial as well as real estate sector; Gov’t measures to achieve this incl. administrative closures, tightening of credit (selective credit), strict enforcement of environment regulations etc.
Credit tightening: China’s biggest issue is “credit misallocation” & resultant bad debts – which needs to be focused & improved for better markets. This will bring industrial activities in 2016 under “profitability stress” & negatively impact either the prices or the capacity utilization. Companies may most likely consider lower capacity utilizations due to significant pressures on business profitabilities leading to industrial closures, consolidation & market based bankruptcies.
With depreciating RMB (Chinese currency) expected to continue in 2016 too – it may make local manufacturing more competitive for exports. However due to above macro scenario, benefit will not be realized immediately but will see the effect only around later 2017 or 2018. This will create negative pressure on prices world-wide esp. for commodity, which has already been witnessed.
Gov’t announcements of supply side curtailments have been done for Steel, Coal, Aluminium & Copper such as capacity closures/ plant closures etc. because of weak demand. Such measure may limit the further crash in prices but it is expected to go down because of inventories & global supplies.
Crude Oil demand in China may not be strong in 2016 than that of 2015. It is anticipated that similar trend may be followed by Natural Gas prices. As a result, China may start re-marketing LNG stocks due to higher supply anticipated from Australia & central asia
Due to slower economic & industrial activity anticipated in 2016 – even power demand may have negative trend in 2016 vis-a-vis 2015. This coupled with excess supply of coal from Australian & other regional miners will off-set the limited benefits of depreciated RMB to Chinese miners. Such situation will further negatively impact coal prices.
Steel prices are anticipated to go down even further as Chinese State-owned mills & traders are not keen to hold stocks which they confidently did back in 2013. Only way supply and demand can balance is by significant reduction in capacity utilization of Steel Mills.
Copper prices may increase only if Govt goes ahead with plans for power grid development, which is on slow pedestial due to anti-corruption arrests which has been going on since 2 years.
Capital Account is negative (outside Govt intervention). This is because citizens & Corporates are buying real estate / projects outside China (recent news in Indian papers: large Industrial SEZ coming up in Haryana by richest Chinese industrialist as lead invenstor). This is also confirmed by people in UK / Europe / US coupled with “lower in-bound” investment in China. This is likely to continue in 2016.
Chinese equity market has been over-sold multiple times. This will couple with massive capital outflows pressure in 2016. One can easily anticipate the situation of equity markets as institutional investors may slowly start pulling out from high stressed scripts.
One-belt One Road initiative: Chinese Govt has embarked on strategic initiative to target all Asian & neighbouring countries to assist in infrastructure development. This will bring second round of economic growth for local Chinese industry. Real effect is expected from 2017 onwards as 2016 will focus on getting these countries on-board through Govt negotiations. Asia Infrastructure Investment Bank (AIIB) is formed with KV Kamath as 1st Chairman & is based in Shanghai. Though India is partner to this, how India plays it’s card in these initiatives is to be seen.
Such situations always bring focus on national interest & Chinese Industry may even decide to dump it’s excess capacity across all categories at lower prices with Govt support: which will send global prices spiralling down. This is a likely possibility however only coming year(s) will decide how it shapes up.“
Following note was penned in mid of Jan-2016 basis then available facts, research on economic & geo-political issues and combined with regional elements. Glad that much of the anticipated views were fairly close what was anticipated as time passed by.
Trust you found this an interesting read while reflecting on current situations.
