China March Commodity Review: Part 1

Market Recap

Early March was dominated by the 11th National Committee of the Chinese People’s Political Consultative Conference, otherwise known as the People’s Congress. It is an annual event with the usual lip service of providing a better quality of life for the people through a growing economy. This year, however, marked a break with tradition as China’s Premier, Wen Jiabao, used the event as a platform to outline the daunting task of keeping the country’s economy on a positive track in light of the current economic malaise.

Premier Wen is adamant that China can achieve GDP growth of 8% in 2009 and is essentially putting his money where his mouth is. He is no fool and knows the provided stimulus package of 4 trillion yuan ((585 billion US dollars) can only go so far unless the Chinese people pick up the slack and start consuming. To do this, Wen is already in the process of cutting personal income taxes, increasing salaries to teachers, providing more liquidity to banks, reducing stock transaction taxes as well cutting taxes on property sales and perhaps most importantly offering various subsidies to stimulate purchases in the rural countryside.

While there are plenty of people commenting on the “merits” or lack there of China’s stimulus package, there is no doubt it is beginning to work. A commitment to revive the auto industry via subsidies provided to increase auto sales in rural areas have helped the ailing US automaker GM see a 32% jump in minivan sales for the first two months of the year. Farmers, who only months ago delivered produce to markets with the well known three-wheel, oversized, blue motorcycles, are now using bright and shiny new minivans. It’s hard to appreciate just how massive this is unless you’ve been there. But, imagine thousands (and I literally mean thousands) of these wholesale vegetable markets in every corner of the country that had all these motorcycles mentioned above delivering produce. The change over to minivans is utterly astonishing. Likewise, despite a worldwide slump in rubber prices, Chinese tire makers are having a hard time meeting the surging demand for tires as a result of the stimulus offered to the auto industry. The positive benefits to oil and gasoline consumption by the country will soon be evident with the additional cars on the road. Moreover, it will be intriguing to watch in the coming months the ripple effect of China’s economic stimulus package on a range of industries.

This column will attempt to recap the economic climate of the country. Today is on the introduction. In the future it will be several pages, first on a bi-monthly and later on a weekly basis. The second half of the research package will be a similar recap for several of the most followed commodities in China, beginning with cotton, soybeans, corn and wheat. Later, we will add additional commodities where appropriate.

After reading, please feel free to offer comments, questions and/or criticism—all of which are most welcome. I can be reached at jim.lambert@fcstone.com.


Best regards,


Jim Lambert
FCStone, China Analyst
615.234.2759

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Cotton

By the end of February, seed cotton deliveries had exceeded 90 percent. The ongoing reserve procurement has strengthened seed cotton average prices around the country. A little over a month ago, the national average price paid for seed cotton was approximately 4.76 yuan/kg. Now, it is slightly over 5.00 yuan/kg.

To date, reserve procurement totals now exceed 2.5 million tons with more than 1.3 million tons coming from Xinjiang and the rest split between inland provinces. Recently, daily reserve purchases have begun to taper off as have seed cotton prices. Both 200 and 400 type merchants are beginning to withdraw from the market and some price weakness has been noted around the country. There has been continued talk over the absence of high quality grades as well as the strict requirements for tendering purchases to the state reserves. Therefore, its no surprise purchases for the reserves are coming to a halt.

Rumors continue to surround additional reserve purchases out of Xinjiang but to date no word has been forthcoming. What may likely happen is the government waits to announce additional purchases but allows the rumors to keep circulating long enough for farmers to consider the benefits of planting more cotton. Overall, the reserve procurement program has achieved its dual objectives of preserving and protecting the interests of the domestic growers.

The continuing National Cotton Market and Monitoring Services (NCMMS) weekly and bi-weekly planting intention surveys reveal what most have suspected all along—China will plant fewer acres of cotton for the 2009/2010 marketing year. Major cotton producing provinces announcing prominent reductions include Hebei (down 7%), Jiangsu (down 20 to 30%), Shandong (down 13% ), and Xinjiang (down 5.5%). The strength in seed cotton prices as noted above may switch a few acres back to cotton.

For textile mills, the steady rise in seed cotton prices has translated into higher landed the mill lint cotton prices with price gains of 300 to 400 yuan/ton (1.99 to 2.66 cents/pound) noted since early February. Improved demand for downstream products has also picked up and this has helped boost mill confidence. Another factor giving mills some optimism is the government’s consideration of increasing the current textile export rebate from 15% to 17%. Just recently Ministry of Commerce officials have stated the textile export rebate has plenty of upside potential. This is all the more welcome, considering exports for textiles and apparel in February reached 6.705 billion US dollars, a staggering 56% month on month drop as well as a 34% year on year decline. Improved market sentiment notwithstanding, mills will likely remain hand to mouth buyers, with a keen eye on timely purchases of high quality cotton and a commitment to preserving cash flow.

The ongoing dispute between the American Cotton Shippers Association (ACSA) and China’s General Administration of Quality Supervision, Inspection and Quarantine (AQSIQ) over the required registration of all foreign cotton enterprises selling to China ended with American shippers agreeing to the terms set forth by the government bureau.

And last, come commentary on the CNCE E-Forward Market and ZCE futures markets is probably due. CNCE prices have remained strong during the entire course of the reserve’s buying program with the nearby contract, May, approximately 275 yuan/ton higher at 12,210 versus early February. ZCE futures are higher well, with May up 135 to 11,875 yuan/ton versus early February.