Morning Mumble: Chinese Auto's (Designs) - reduction in sales tax + housing stimulus + Vedanta (Iron ore), Glencore (Thermal Coal + PGM) and Centamin

Good Morning, 

Near all mining/resource stocks rose until the last hour yesterday where profit-taking took place. In part due to the Chinese machine waking up in what would have been near 12hrs later.  With one day of trading before a weekend, the markets will be looking to some indication of the Chinese outlook. In addition of course to the PR (Glencore) and the overall commodity price actions. The SHCOMP finished up near 3% in thin but positive trading.

With shorting currently limited in China it’s unlikely anyone has been impacted significantly and in fact, their market is likely to have profited. There will be a read across to the higher material costs to Chinese manufacturers and producers. Despite thin volume, iron ore has been slipping and with margin requirements being higher, don’t expect too much of a recovery with supply increasing.

We've discussed the decline in liquidity in China for some time, whether in SOE's (State Owned Enterprises), private sector or Local Government, there’s a very consistent theme. The FT has highlighted what has been known about for some time: China futures market decimated by trading curbs. All the same worth a read, but more so to keep an eye how things pan out. 

News is apparently flowing out of China that new stimulus packages were announced whilst the Golden Week Holidays were in full flow. It wasn’t this week at all, the policy came into effect on the 1st October, just in time for the Golden Week! One wonders when people will read the press releases properly.

In an effort to stop the rot and improve the decline in car sales (See: CAAM Chinese Association of Automobile Manufacturers), they have cut the sales tax on passenger vehicles to 5% (from 10%). The criteria is limited to engines below the 1,600CC and time limited until the end Dec 2016. 

With a degree of humour, VW might have some good news - China are likely to implement additional incentives for cars that don’t meet the emission standards. We obviously avoided calling the scheme scrappage.

For Western Manufacturers importing or operating under a JV there will be some positives. The main beneficiaries are likely to be the Chinese manufacturers with small engines. Feel free to check out the designs see: Great Wall Automobile Company, Guangzhou Automobile Group Co., Ltd (GAC), Zhejiang Geely Holding Group, Changan and SAIC Autos (MG Rover etc...). We are obviously not qualified to comment on the design or quality, perhaps there’s some cultural differences one needs to acknowledge?

Considering the last time (2008/09) such a specific stimulus was implemented, sales peaked near 40%, albeit declined 50% year on year until now being reduced back to normalised single-digit growth.

With consumption being the key focus, a mobile population will be incentivised to spend hard. Whether it be an increased numbers of shopping trips, holidays (driving holidays are on the increase), eating or visiting family, it’s a delightable feast for the economy and the tax revenues!  Assuming of course that the Chinese buy into the enticement / tax cut.

With income growth slowing, deflation and risk of redundancy or job sharing in most sectors, being enticed to take on the liability of a car with a) via credit or b) utilise savings – it’s going to be hard to entice new customers.

Until more recently similar contractions have been seen in the housing sector, where buyers have been unwilling to buy in significant numbers. What with the newly married “living” with parents situation is on the increase again in China.

Property buyers in China know all too well about paying over the odds for assets. Last week’s adjustment to the down payment requirements for a home will aid the property sector. With a reduction to 25% from 30% it’s a notable enticement for some. Although only likely to benefit those whom are well on the road to purchasing a property – albeit purchasing off the Government is still the preferred method with such hefty discounts available.

China now has an emerging tier 1 and 2 divide (North-South Divide), where prices of property in small cities and towns are falling, whilst larger towns are seeing a renewed interest. Aided in part by a reduction in prices, free-goods and price reductions that the tier 1 market has barely had to adopt to motivate sales. (See Top 10 below – if you have to buy)

1. Hong Kong
2. Shanghai
3. Beijing
4. Shenzhen
5. Guangzhou
6. Shenyang
7. Qingdao
8. Nanjing
9. Tianjin- this may however change as investment is focused elsewhere. 
10. Chengdu

We had Vedanta seeking permission to export more iron ore from Goa. Why they’re bothering with prices at $40/t FOB, is anyone’s guess with Roy Hill and Tonkolili (Shandong) firing up. One suspects they have to be at full capacity to make their operations modestly cashflow positive.

Just as Glencore’s had plugged most of the holes, yet more market woes. NH@FT’s article on Australia thermal coal price at 8-year low has been followed by Coal Problems Being Made Worse by Global Slowdown, Glencore Says (BBerg) - not the best timing for Glencore. However, one is minded to think conservatively with regard to thermal coal.

Its best to avoid sticking pins to prices specifically, especially the likes of coal where so many have been burnt before. It’s prudent to test the theory that the prices are perhaps near to the bottom - over to X2 Resources and Rio.

Like many in the commodities space, the marginal producers have been saved by costs that are reflected in dollar terms, with a benefit from a weak local currency for labour and energy/fuel costs reducers. The operators have averted (delayed) the inevitable pressures to shut in production/mothball. As the situation reverses, expect a tightening in supply to benefit pricing.

Glencore’s discounted offering is as a result of declining demand in once upon a time more stable markets that had some degree of clarity in outlook. Japan’s restart of Nuclearreactors  benefited the likes of Tohoku Electric Power, whom have just agreed with Glencore for premium thermal coal contract at $64.60/t.  A near 14% discount to the previous contract has not gone unnoticed.

The issues being experienced in South Korea and Taiwan won’t have helped the bargaining power of the thermal coal producers. Asian countries, with a majority of trade bias towards China are starting to see a tightening of liquidity in part because of reduced trade with China.

As a positive Oil, save for any major uplift in crude supply (Shale operators be warned) that would impact on pricing, its likely to have found some form of a floor. With shale producers having an appetite to hedge their production around current prices, its suggesting production is reaching some form of normality - contrary to the earlier opportunities that were missed.

Glencore appear to not be pushing the news they’ve shut in production at the Eland platinum mine in South Africa, with the loss of 818 jobs.

Over to gold - Centamin Egypt (CEY) Q32015 Preliminary Production Results reminding the market why it’s sensible to factor in lower on grades, production or machinery woes. CEY’s grades weren’t near the reserve average, so suspect costs to be impacted to a small degree.

Given a sensible headwind in grades, CEY are likely to just drag themselves over the 430K bottom line guidance by near 2K ounces, assuming production of near 110K+ ounces in the 4th Quarter. A reminder that production was meant to have annualised at a rate of 450K ounces by the 3rd Quarter if not the 4th. As stated in the Q1 production results. Date for diary, 11th November 2015.

Finally, a positive result for Northern Dynasty Minerals, where a report by Former US Senator & Secretary of Defense William S. Cohen has been released. Suffice to say it doesn’t read well for the conduct of the EPA.   

Atb Fraser