China’s effect on metals and, on related metals, stock prices
Perspective is the key to objective assessment. There are three global market classes for metals; base metals, such as iron and aluminum; precious metals, such as gold, silver and platinum group metals; and critical technology metals, such as copper, lithium, cobalt and rare earths, in descending order of value to society. Today, the majority demand for physical metals in all three classes comes from China, which now represents almost 60% of the physical demand for all metals!
You read and see, in the financial news, the troubles of a Chinese real estate developer called Evergrande, and how his vast over-leveraged position (more debt than he can ever pay off) is crumbling and could soon spread across the world. Chinese money and the stock markets like contagion if no cure is offered for the disease. The talking heads of the mainstream media love this analogy because it allows them to use their aging Covid fear tactical system to characterize this as a Lehman moment in the Chinese economy.
China does not have a free market economy. All of its companies and banks are monitored daily from Beijing by the Chinese State Council, regularly and mistakenly referred to as the Chinese cabinet by our mainstream media, but, in fact, it is the operational center of power for foreign policy and industrial china. In turn, the State Council takes its leadership from Chinese President Xi Jinping, who dictates China’s foreign and industrial policy.
The newsletter, Sinocism, addresses the Evergrande effect as follows:
“… Xi [has] exposed three difficult battles for the government: poverty, pollution and financial risk. Significant progress has been made on the first two, but the fight against financial risks has lagged behind. Maybe Evergrande will mark a turning point in this battle, or maybe the problems are so deep that they will have to back down from the strictest efforts to curb real estate, as they must have done after previous attempts. to launch the worsening economic crisis. and the political turmoil that is real estate in the PRC.
The “advantage” of the PRC system in dealing with damage such as Evergrande is that regulators have significant powers to “persuade” other companies to help them, and a strong system of maintaining stability to ensure that creditors, employees and apartment buyers will accept the best haircut offered and not cause too much trouble. Yes, there have been small protests, but if things go as in other similar cases, protests will be allowed for a while, as people have to let off steam, then the organizers will be notified if they are not. not stopped, then the rest of the discontented will accept what is offered to them and “like” it, without any recourse. Equity holders and foreign creditors don’t really fit into this equation, they probably won’t get anything.
So we have a big mess with a lot of people losing money, but not one that is going to cause a systemic financial crisis inside the PRC. But as many analysts have said in recent days, we should expect a bigger than expected slowdown in GDP growth (Italics and bold type mine) This is going to be an interesting year until the 20th Party Congress…. “
So, as the Emperor of Austria told Mozart in Amadeus, “There you have it. In this case, the very real probability of sharply reduced demand for almost all metals due to China’s “expected slowdown in GDP growth”.
The price of ores of the world’s most produced and historically produced metal, iron, is a good predictor. China produced 1 billion tonnes of steel in 2019. This represented 55% of all global steel production. President Xi has declared (ordering, in other words) that the Chinese steel industry must cut production. The net effect has been a yo-yo’ing in iron ore prices, which doubled last year and recently fell 25%. This kind of price change will surely eliminate fluctuations in Chinese GDP. In fact, China’s GDP is really the determining factor in the price of iron ore.
China needs 1.67 billion tonnes of 62% iron ore per year to produce its current steel production. At today’s prices, that’s almost $ 300 billion in cost. Compare that to the less than 0.5 million tonnes of ore concentrate needed to produce its official 130,000 tonnes of rare earths. At today’s ore price of less than $ 2 billion or just enough capital to supply the Chinese steel industry with ore for 2 days! Note that the official production value of rare earths, even measured as high purity separated oxides processed, would be less than $ 5 billion. Just enough capital for 5 days of ore supply from the Chinese steel industry.
Better yet, look at the gold. China was, again, in 2020 the world’s largest gold producer with an output of 365 tonnes, with a market value of $ 20 billion. China’s gold reserves are now officially around 2,000 mt, which today amounts to $ 125 billion. The average price of hot-rolled steel coil futures, so far in 2021 has been $ 1,000 / mt, so the Chinese steel industry output on the basis of this price average will be $ 1 trillion this year, before any added value. through its use to manufacture industrial and consumer products. Think about it, China’s gold reserves are very large, but its steel production is worth much more. I note that it is assumed that the Chinese gold reserves are probably around 14,000 tons, which would be almost a trillion dollars at the current price of gold in dollars. Also note that US steel production for 2019 was 77 million tonnes, just 8% of China’s, and US holding of 8,000 t gold would be worth 500 billion tonnes. dollars compared to the $ 77 billion worth of its steel production. Quite the opposite of China?
As a final example, let’s look at lithium production in China. In 2020, it was about 300,000 tonnes of lithium carbonate (60% of the world total). The current price of lithium carbonate is $ 16,000 / mt, so Chinese production is valued today at around $ 5 billion, roughly the same as its rare earth production.
If the Evergrande effect is to reduce China’s GDP, the demand for all three classes of metals will decline, as will the prices of the raw materials needed for their production and the value of any additional supplies to be added by junior miners.
Don’t just consider the selling prices of any class of metal ores or the prices of “finished” industrial and consumer commodities when considering an investment in a junior miner. Look at the overall market for the class or the total market for each of them. Metal ores are a buyer’s market, and 60% of all these buyers are in China.
China’s goal is to make its currency a global reserve currency, so be careful, because if and (probably) when metals and minerals are valued in RMB, dollar inflation will be a very big factor in it. the price of metals and their minerals. And, I believe, that metals and minerals of all classes are not produced or controlled nationally by a country in sufficient quantities for its own needs, after converting prices to RMB, never will be after that. . Chinese leaders are not ready to let the RMB float, that is, be freely convertible into other currencies in markets not controlled by China, and therefore its reserve currency status is not going to happen. anytime soon.
But China’s plans for the long term and security, not profit, are the driving force behind its Chinese-style capitalism. The openly stated plan is to replace state capitalism with socialism with Chinese characteristics. China has achieved self-sufficiency in the acquisition, processing and manufacture of metals in all three classes. They say that whoever has the gold makes the rules. It would be better to say that only one who is self-sufficient in raw materials and energy makes the rules.
In the metals markets, if China sneezes, the world catches the cold.