China’s climate policy in disguise

I heard of import tariffs but not export tariffs

Is exporting inflation, China’s new ‘weapon’?

Maybe this is part of China’s net zero emission plan?




Would you like to know why HRC (hot rolled coil steel) prices have quadrupled in the past year?





The world’s largest steel producing nation has been imposing and increasing tariffs on its own steel exports.

I’ll repeat, Chinese companies are required to pay a tariff in order to export their product.

High purity Pig Iron exports attract a 20% tariff while Ferrochrome stands at 40%.
Furthermore, China has removed export tax rebates for 23 steel products including flat and rolled steel)

This is quite incredible. 

It is quite normal for nations to impose a tariff on goods being imported onto their shores and limit ‘product dumping’ but to ‘discourage’ your own corporations from global competition and profits is an extraordinary tactic.

In 2020, total world crude steel production was 1877.5 million tonnes (Mt). The biggest steel producing country is currently China, which accounted for 57% of world steel production in 2020.

The next 6 countries (regions) account for a combined 28.4%. 

They are:
#1 EU  7.4%
#2 India  5.3%
#3  Japan  4.4%
#4 U.S. 3.9%
#5 Russia  3.8%
#6  South Korea  3.6%
.
.
.
.
#29 Australia 0.3%

Australia’s annual steel production is 5.5Mt, ranking behind the production of Bangladesh, Austria, Malaysia and Belgium.

One-third of Australia’s steel needs (nearly 2Mt) are imported, with most it coming from China. The rest is supplied by local manufacturers such as Bluescope Steel.

So, the news becomes even more alarming when the amount of steel imported from China has fallen by 50% in the past several months.

Can you see how half of 2Mt is a pittance of China’s 1,065Mt worth of annual production yet it has a pronounced effect on Australian business.

But what is China export tariff strategy telling us?

Firstly, China is ‘ring-fencing’ some its industrial production perhaps its seen as a form of ’nationalism’ but more so, I see it as securing or better yet, retaining its supply for its own consumption.

This could also be a measure of protectionism, but this is not new because western economies already do it themselves.

When you have a powerful (and enviable) position such global ‘market share’, you can withhold supply, causing localised prices to rise, thus hurting industry and consumers in far away locales.

Whilst imposing tariffs of steel exports will accentuate output gaps in all those other nations and higher prices may remain, by sacrificing some capitalist profits, this may be one aspect how China will reduce its carbon emissions…….

Have a think about that notion?

In addition, after decades of the global juxtaposition of China exporting deflation (and many enjoying lower prices), China may be now “exporting” inflation. 

It may be the definition of being ‘careful what you wish for’.

With its own currency testing multi-year highs (helping put a lid on its own inflation rate), could China’s new export to the world actually become Stagflation?






Don’t forget to subscribe to my blog to receive other notes, the moment they are published or equally feel free to email with a question or comment.



Until next time,

Warm Regards,
Rob Zdravevski
rob@karriasset.com.au

Europe is concerned about China decoupling

The main message of this report is China ‘channelling’ a macro, trade, political and digital decoupling with Europe.

This theme takes some thinking. Many thought China would find friends or solace amongst Europeans amidst a heated spat with the U.S.

Silk Road rhetoric aside, China is taking a binary road instead. Either they are embracing globalisation or nationalistic protectionism. The latter seems to be the current path.

“It is this blend of China’s conditional coupling, a vast state-aid apparatus and protectionism extended to national

champions, and Beijing’s new-found self-confidence in its non-convergence with Organisation for Economic Cooperation

and Development (OECD) norms and principles that is driving the current ‘crisis of interdependence’ with China.”

October 13, 2021

by Rob Zdravevski

rob@karriasset.com.au

#china #oecd #decoupling

Perspective and Hypocrisy

What is the big deal with the Chinese government’s recent directives stymying technology or education firms?

During the 2010’s, the U.S. Department of Education either forced the closure or change of ownership, sued or ended accreditation or recognition of ‘education providers’ such as DeVry Education Group (now Adtalem Global Education), ITT Educational Services, Corinthian Colleges and Apollo Education (which was taken private at $10 per share, compared to its high of $89/share in 2009).

For example, then Californian attorney-general, Kamala Harris led the charge in suing Corinthian (leading to their demise in 2016 when she won her judgement) for predatory practices of mounting and leaving students in crippling debt……much like China’s concerns today.

In addition, didn’t the U.S. government force the break-up of AT&T and Microsoft?

And I wonder……aren’t Google, Facebook, Microsoft, Apple etc, some type of pseudo-government agencies ?

or at least, at their behest or influence?

Between all the congressional hearings and testimonies and the ‘cloud’ of anti-trust undertakings, a little perspective is required to the current Chinese news.

After all, it is not a far-fetched idea that Amazon is forced to ‘spin-off’ its AWS division.

The hypocrisy of western governments doesn’t seemed to be recognised by their own selves. They apply a host of restrictions, rules and bans too.

Perhaps China is entering its own Progressive Era and the U.S. may have its own 2.0 version?

https://www.bloomberg.com/news/articles/2021-07-27/china-tech-crackdown-xi-charts-new-model-after-emulating-silicon-valley?sref=qLOW1ygh

July 30, 2021

by Rob Zdravevski

rob@karriasset.com.au

Take your pick – Thorium or Uranium

While I have hinted that I am bullish on nuclear energy and uranium……I have been an avid watcher of thorium which has been seen as a nascent alternative but in truth it has existed for some time. Its evolution has been retarded for a host of political and capitalist reasons.

An extract from this article says, “China has some of the world’s largest reserves of thorium, a silvery metal with weak radioactivity. By some calculations it has enough to meet the country’s energy needs for at least 20,000 years. By contrast, China has some of the lowest uranium reserves of any nuclear-capable country”.

https://www.neimagazine.com/news/newschina-moves-forward-with-thorium-molten-salt-reactor-8919220

Chinese stocks are not popular

A most interesting contrarian, oversold investment opportunity on my radar is the Hang Seng China Enterprises <equity> Index (“HSCEI”).

The HSCEI serves as a benchmark that reflects the overall performance of Mainland Chinese securities listed in Hong Kong.

Index constituents include Bank of China, Sinopec, Alibaba, Conch Cement, Geely Auto, CNOOC, China Mobile, ICBC, CITIC and Tencent.

With all the hoopla surrounding restrictions of where Chinese companies are permitted to list their publicly quoted securities, temporary mis-pricing is often what occurs at such a moment.

The HSCEI has declined 20% from its February 2021 peak.

Why would Chinese authorities ruin their ascension onto the global capital markets scene by restricting foreign capital interest and retarding their own companies seeking liquidity?

It doesn’t make sense and I think there is some type of smokescreen (tactic) behind the latest announcements which may include inflicting a little pain on U.S. investors or flexing a little (soft-power, economic) muscle.

Don’t lose sight of the larger part of a story. China wants to have a financial services and capital market industry similar to the Western World.

They are hiring ‘western’ skills and offering full banking licenses to ‘western’ firms, just so they can be ‘like us’.

It is in China’s interest to bid for foreign capital.

For example, China is the world’s 2nd largest bond market. Today, the foreign share of the mainland Chinese bond market is 3.5%, which has risen from 1.2% at the end of 2017.

Interest in Chinese capital markets (bonds or stocks) will continue to grow with news such as $300 billion to enter the bond market as a result of FTSE Russell officially adding China to its World Government Bond Index in October 2021.

In order to sniff out an investment opportunity, it’s important to filter or dissect the current ‘noise’.

July 8, 2021
by Rob Zdravevski
rob@karriasset.com.au

* not investment advice, just commentary

The effect of Biden’s Chinese investing bans

There are so many 2nd and 3rd derivative effects from this news.

https://www.bloomberg.com/news/articles/2021-06-03/biden-to-blacklist-59-chinese-companies-in-amended-trump-order?sref=qLOW1ygh

The headline screams nationalism, protectionism and death to globalisation.

Then there is worthy speculation about trade wars, military tension, broader protest by Chinese manufacturers to curtail supply to American companies and currency manipulation to occupy my time.

n.b. the Chinese Yuan is at a 3 year high versus the USD.

Albeit I understand the security concerns behind this decision but the card has been badly played.

Biden’s strategy is to win votes and maintain control of both houses at the November 2022 mid-term elections, when all 435 seats in the United States House of Representatives and 34 of the 100 seats (14 Democrats and 20 Republicans) in the United States Senate will be contested

He will do that by spending big (enriching or impressing the populous) and being tough on China. Both things Obama never did.

Biden won’t forget that in the middle of Obama’s first term, the Republicans ended unified Democratic control of Congress by winning a majority in the House of Representatives.

My mind tells me that opportunity will lie in declining Chinese stocks (it’s always interesting when there is forced selling), a rising U.S. Dollar (this will impact commodity prices) and rising U.S. interest rates.

China can weaken their currency and sell a bucket load of U.S. Treasuries. They are the largest foreign owner of U.S. debt. This will send yields higher which increases U.S. government borrowing (it’s interest bill) costs and triggers other inflationary risks (? short Manhattan property again ? )

Interestingly, the Australian Financial Review said, “Australia has not developed a similar list of Chinese companies that Australians are not permitted to invest in personally or through a company.”

Can you imagine that ? ….a government telling me if I am allowed to own shares in a company which is traded on a public market where I’ve previously been permitted to trade shares.

June 4, 2021

by Rob Zdravevski

rob@karriasset.com.au

Trusting China (Part 1)

At a recent investment forum, the topic of the prospect of a U.S. Dollar losing its reserve currency status was raised.

Consensus pointed at the Chinese Yuan (Renminbi) taking over that mantle over varying range of timeframes.

But when I asked the gathering would they buy the Chinese currency once it becomes the world’s reserve currency, the majority of answers featured the response ’No’ and “I don’t trust the Chinese’.

But I thought,

we have been happy purchase products manufactured in China, for low competitive prices.

In fact, we probably aren’t aware how many Chinese made items we actually consume or utilise, ironically mostly commissioned/ordered by Western corporations.

And we are equally happy for ’the Chinese’ to buy the goods or assets which ’the West’ wants to sell to them.

After all, China flirts with Japan as being the largest owner of U.S. Government Bonds.

So, I pondered the hypocrisy of ‘westerners’.

The thing is…..we will need to, at some point ’trust the Chinese’

Interestingly, JP Morgan Chase CEO, Mr Jamie Dimon (in the recent Senate Banking Committee Hearings) said that Chinese banks will be the prominent competition for the American banking industry in the next 30 years.

<end of Part 1>

May 31, 2021
by Rob Zdravevski
rob@karriasset.com.au

Political Trade Destruction

Dear Australian #auspol politicians involved in incompetent trade and diplomatic rhetoric……it is in the “Chinese” tea leaves, that Iron Ore is next on the list of ‘sanctions’. I just wish the media would call them sanctions. It would sell so much more advertising…..

Politicians who are inexperienced in business and unable reading the geopolitical mood are causing more damage than their pea brains can possibly imagine.

Don’t they understand that a backbencher from an obscure political seat calling for an “inquiry into the origins of a Chinese flu” is a badly weighted bet and ramifications of the rebuttal can hardy be comprehended by someone inadequately positioned to speak in a manner within a nation’s parliament.

In these circumstances, political table-pounding seldom prevails over commercial reality and necessity.

Don’t look know, but to the complacent producers of current and future ‘sanctioned’ products, our politicians are doing some effective price mean reversion on behalf of your wallet.

October 13, 2020
by Rob Zdravevski
rob@karriasset.com.au

A Bull in China….

The chart below shows the Shanghai Composite today is trading at the same price it was in 2018, 2015, 2010, 2009 & 2007.

More so, it has been a flat market for the past 4 years,

In the interim, I expect that market to come back a little, perhaps to 3,100 (about 10% decline), while my indicators are confirming the longer trend is higher.

August 31, 2020

by Rob Zdravevski

rob@karriasset.com.au

 

Shanghai Weekly

Iron Ore – As Good As It Gets

June 23, 2020

by Rob Zdravevski
Iron Ore – As Good As It Gets ?

Over the past 6 weeks, the price of 62% grade Iron Ore has risen 25%. It’s now trading around $102.

Prices have risen due to a combination of China’s factories and manufacturing returning to a “normalised” utilisation and Brazil shipping less ore.

The previous spike, in January 2019, saw Iron Ore price climb from $75 to $95 within 2 weeks and a subsequent surge to $125 occurred over the next 3 months.

This was mainly due to the collapse of a tailings dam in Brumadinho (owned by VALE), which also tragically resulted in lives being lost.

I can’t quite reason about the cause of the 2nd lurch higher as economies were at the tail-end of a 7-8 year economic cycle.

However, the price normalised back to over the next 4 months as Australian suppliers filled the gap.

<see chart below>

Today, the price of Iron Ore has risen again due to a Brazilian supply disruption aided by “newer news” that Brazil’s COVID-19 environment is worsening.

Once again, Australian iron ore miners seized the supply opportunity yet prices have continued to roar ahead.

It is at this point in time, that I now think, that this is as “good as it gets” for the Iron Ore price.

But I also have the following questions;

  • Can Brazil contractually sell Iron Ore to China below prices as seen in the spot and futures markets?
  • Is it true that Brazil produces a higher grade of Iron Ore than Australia?
  • Will Brazil’s cheaper labour and production give them an advantage?

If the answer to these 3 questions is “Yes”, they then qualify for two of the three “cheaper, better and faster” categories.

Brazil could also be “faster” getting ore to the port, although overall we need to keep in mind that it does take 45 days to ship Brazilian Iron Ore to China when compared to the 12 day journey for Australian suppliers.

Anecdotally, I can’t help speculate that Brazil is feeling the strain of lower export receipts and may start to push product through its ports with less hesitation.

Inversely, it’s naive to think that China’s importers are submissive “price-takers” of sensitively priced commodities.

And so, my analysis of the price action in the Singapore traded 62% TSI contract suggests the strength of the advance is waning, as it makes a “rounding top” of lower highs and lower lows, a change in trend is near and the price traded to extremes on various measures.

The “fat part of the trade” has been seen and I expect it to retrace and trade down to $92.

For those who disagree, I am curious what you think will “drive” the price higher from here and how much risk are you taken when compared to the reward on offer when looking at the whole picture?
Until next time,

Rob
Subscribe to my blog: www.robzdravevski.com

Drop me an email: rob@karriasset.com.au

Disclaimer

 

Some extra reading.

https://www.abc.net.au/news/2019-02-12/iron-ore-price-explainer-after-mining-dam-collapse/10800698?nw=0

https://en.wikipedia.org/wiki/Brumadinho_dam_disaster

If you’d like to have a chat to me about some of our best stock ideas for your portfolio, feel free to call me on 0438 921 403.

Rob Zdravevski is the proprietor of Karri Asset Advisors, a specialist in the provision of investment advice and equity recommendations for clients’ portfolios.

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