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China’s Grey Swan is changing colors
The Chinese economy is heading toward an economic hard landing;
it will overshoot to the downside and become the economic Black Swan event of
2011-2012. Inflation, yes both types,
will be the story in China in the coming months.
The steps necessary for an economic black swan landing have
all happened, what is next is just the crash landing. The rains in Australia have cemented China’s
economic slowdown. The rains will have
longer lasting implications for both economies.
-
China is about to have its steel mills shut down
due to a lack of available high BTU coal.
This has always been the weak link in the Chinese export model. A reliance on imported raw commodities.
- China is about to have its electrical grid under
perform during the peak winter months as it uses Australian high grade coal to “sweeten”
local Chinese sourced low grade low BTU coal for their power plants. While these plants will operate using the
local coal, they will not produce the same Megawatt load they did.
- China will have to import emergency supplies of
Diesel to help the local factories to continue to run on their own independently
powered generators.
- China will end up paying at least 100% increase
in high grade coal prices, year over year.
This will have to be pushed into their cost structure, it is too large
to absorb.
The Chinese are going to be shopping the worlds markets for
any available coal with BTU content higher than their own average domestic
coal. They have no choices. They are going to be buying coal from the US
east coast terminals in size before this is over.
The need to import high grade coal ore & iron ore are
the two Achilles heel of their export based economy. China is going to be pushing up coal prices
around the world, making locally sourced steel profitable again in the US.
The Chinese are also looking at an increase in iron ore, the
primary input for steel mills. Vale has
raised rates by 8.8% for the 1st Quarter of 2011. BHP is
reported to have raised rates by 40% this year. In the future, BHP is now negotiating quarterly
rates. The inflation
in iron ore for the 1st Q of 2011 is reported to be 7% higher
than last Q2010.
The last time that Australian coal fields were flooded, the
price of high grade coal reached $300 per ton.
The price for Australian coal for 1st quarter 2011 was $225 per ton, and
this was before Force Majeure was declared.
It was an increase of 75% over the price negotiated in March 2010.
The new flooding is going to push prices of high grade coal
to $300+ this time. The flooding is more
extensive, with the damage to the local Australian infrastructure worse this
time. This is not going to be a quick or
easy repair job in Queensland. This is
going to be a longer lasting event than the main stream media is giving it
currently.
In simple terms, there are two types of inflation.
- ·
There is cost push inflation where a producer is
able to increase prices, because of an increase in raw costs. - ·
There is the expectation of inflation type. This
is the source of all past hyperinflationary events!
The second type is the dangerous type. Expectations of inflation infected the US
economy when Paul Volcker took charge of the US Federal Reserve. He raised interest rates in the US, until he
killed the expectation that there would inflation. It was
a gutsy call at the time, and is what provided the fuel for the historic bull
market of 1982 -2000 to grow.
Today, the media
pundits are talking about a slowdown to the mid-single digits because of
Chinese government attempts to slow down inflation, or said better the
expectations of inflation. It is the
second type of inflation that the Chinese leaders fear.
Once it’s infected a nation’s population, it does not go
silently away. It takes Volcker type
actions to stop it dead in its tracks.
To do that, China would have to put their economy into a negative growth
period, something they can’t afford to do.
The Chinese manufacturing base is not going to able to
absorb cost push inflation at this point. The US steel industry, with locally sourced
iron ore and coal, is going to be competitive again. This is going to push
expectations of inflation into the Chinese as hard import costs continue to
rise in a slow global economy.
The ongoing economic war between the US & China is driving
up the cost of food for the average Chinese citizen. This
will hit the Chinese hard, as they import a food staples for a growing
middle class. There are already reports
that basic food staples are more expensive on an equal basis in the US,
compared to US food supermarkets.
“On a recent Friday, the balding
33-year-old, who runs a breakfast stand with his wife, wheeled a shopping cart
into the aisle of a C.P. Lotus Corp. superstore in northern Shanghai, eying
only prices. In seconds, his wife emptied the shelves of its 11 remaining
bottles of Cofco Ltd. "Five Lakes" soybean oil, the discount choice
at 47.90 yuan, or about $7.20, for five liters (1.32 gallons).
At the checkout, Mr. Liu separated
their $79 purchase into three batches to sidestep the store's four-bottle
maximum and government bans on hoarding. To transport the provisions to their
food stand, Mr. Liu placed two bottles into the basket of his blue electric
scooter and balanced nine more on the running board. His wife plopped on back.
Mr. Liu's livelihood is now just as
precariously balanced. He reckons his cooking-oil costs shot up 27% in 2010.”
The Chinese have exported deflation to the US for the last
decade. The US for the last few years
using Q.E. has been exporting inflation to China. This two way exchange is now hitting the
Chinese consumer in the wallet. It is
affecting their ability to put expected food staples on the table at dinner
time. This is also about the only way
you can destabilize the Chinese government. The implications of that are
farther reaching then this article…
»
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And...maybe somebody here knows what this means (if anything) per the above article:
Coal supply contracts for 2011 on schedule By Liu Yiyu (China Daily)Updated: 2010-12-30 09:17 Comments(0) PrintMail Large Medium Small
With a price freeze on coal contracts, coal suppliers are reluctant to sign supply contracts with power producers. [Photo / Provided to China Daily]
BEIJING - Thermal coal supply contracts for 2011 are on track to be met after a surge in contract volume over the past two days, amid fears from power producers on the default rate of contracts as coal spot price is expected to jump.
As of Wednesday, over 90 percent of the target volume set by the government has been realized, according to statistics from the China Coal Transportation & Distribution Association.
The volume of thermal coal contracts surged on Tuesday as the deadline approaches, with 370 million metric tons of coal contracts signed, accounting for 40 percent of the total volume target, according to the China Coal Transportation & Distribution Association.
China increased the amount of thermal coal it will allow to be sold for 2011 contracts to 769 million metric tons, the National Development and Reform Commission (NDRC), the top economic planner, said in early December. Power producers and coal mining companies have 25 days to sign contract supply agreements.
The NDRC also froze contract coal prices for 2011 at this year's rates in efforts to curb inflation, making coal suppliers reluctant to sign contracts with power producers.
The contract price for coal is set at 520 yuan ($77.32) per metric ton, 200 yuan lower than the current spot price.
The gap between spot coal prices and long-term coal contract prices has led to a standoff between China's coal producers and buyers. Analysts expect the price gap may result in 20 billion yuan in losses for coal mining companies, according to China Securities.
Related readings:
China's net coal imports likely to hit 230m tons in 2011
Coal trouble in cold weather
China to increase coal imports from Russia
Power giants take hit from high cost of coal
The price restriction is also aimed at helping the nation's power producers, which are recording losses after coal prices soared more than 20 percent this year.
Based on past experience, resorting to freezing coal prices was always discounted, since coal producers would circumvent control measures by supplying lower-grade coal, reducing contract supplies or simply not following guidelines, Deutsche Bank wrote in a recent report.
About half of the coal supply for power production is from coal contracts but only 50 percent of the contracts were executed this year.
Meanwhile, the cold weather has already caused coal shortages in some regions. In the coal-rich province of Shaanxi, 14 major power stations reported in mid-December that they only had enough coal to meet another 4.4 days of demand.
China's coal production is expected to reach 3.2 billion metric tons in 2010, an increase of 7.9 percent year-on-year, according to the China National Coal Association.
Coal miners' inventories decreased 30 percent to 40 million metric tons while power producers' stock doubled, at of the end of November, the People's Daily reported.
This is not directly related to coal, but definitely to energy in China:
BEIJING - China has made a breakthrough in spent nuclear fuel reprocessing technology, which could greatly extend uranium's usage rate and potentially solve the problem of its supply shortage.
Related readings:
China claims breakthrough in nuclear technology
India, Pakistan exchange nuclear lists
Putin hails US nuclear arms treaty
The technology, which was developed by the No 404 factory under the China National Nuclear Corp (CNNC), is able to boost the usage rate of uranium materials at nuclear plants by 60 times.
"With the new technology, China's existing detected uranium resources can be used for 3,000 years," according to China Central Television (CCTV) on Monday.
China, the world's second largest economy, has more than 170,000 tons of detected uranium resources.
"We're among the few countries that can implement the recycling of nuclear fuel As such, we, to some extent, lead the world in this field," Sun Qin, general manger of CNNC, China's largest nuclear generator, was quoted by CCTV as saying.
The nation has strived to extend the usage rate of the strategically important resource to meet growing demand. The country aims to increase its nuclear power capacity to 40 gigawatts (gW) by 2020 compared to just more than 9 gW of nuclear capacity at present.
China, as one of the world's largest energy consumers, now has 12 nuclear power plants in operation, with 25 reactors under construction.
Uranium demand in China is expected to reach 20,000 tons annually by 2020, according to figures from the World Nuclear Association. But China will be able to produce only 2,400 tons of uranium that year.
China used 1,300 to 1,600 tons of uranium in 2009, Reuters reported earlier.
The world has around 4.7 million metric tons of identified uranium minerals. Increasing usage has sparked concerns that uranium demand may eclipse supply soon.
Extending the usage of existing uranium will help China fulfill its target to cut greenhouse gas emissions per unit of GDP by 40 to 45 percent by 2020 from 2005 levels.
"China has invested heavily in uranium exploration know-how and recycling technology to meet the nation's burgeoning needs and increase the ratio of nuclear energy in the total energy consumption mix," said Lin Boqiang, director of the China Center for Energy Economics Research at Xiamen University.
He added that such technology, including the recycling of spent nuclear fuel, is still at a very early stage. If it can be put into practical use, then China can be self-sufficient, he said.
Nuclear power accounted for about 2.2 percent of China's electricity generation by the end of 2009. By contrast, of the 30 countries that have nuclear power generators, 16 had 25 percent of their total electricity produced by nuclear power.
wishful unthinking, to quote ferguson. oil at $150 didn't do it, the GFC hardly scratched them, so it will not be 2011 which has started off rather like 2010 with much pumping coordinated globally by uncle sam's favorite chopper pilot; a 2% inflation in the US would be god-sent for the pilot, and just help the chinese ease their inflation pains so pilot's and CCP's goals are aligned for now. Nor will the fall be 2012, which is reserved for the good ol US of A's bond market supercrash, so it will have to be after that dude, when Chanos and Hugh Hendry's investors close their accounts with these hedge funds, that will be time to watch out. Unfortunately by then, the crash of China would probably be more disastrous for the US than for China.
all this talk about coal, iron ore, steel - sounds like Pete Najarian's orgasmic scream: COOOOAAAALL!!! STEEELLLL!!! RAAAIIILLLS!!! POOOOTTTAAASHHH!
Please enlighten me, how much coal and iron ore Foxconn uses to make an iPhone? How about the children toys? Nike sneakers? A trashcan where iPhone, toys and sneakers will end up?
If china is serious about stopping the real estate bubble, the demand for coal, steel, iron will fall. And if the reports about the stockpiles of materials in China are even 50% correct, chinese plants will operate from the stockpiles until Australia comes back on-line.
Where do you think Foxconn's factories get their power from? Infrastructure to move their goods needs what? Power.
In China, coal = electricity.
Watch the video “Economy Stage 4 Cancer Patient ~ Stocks Rigged” at (http://www.youtube.com/watch?v=BrXcpWKRDf8).
Anonymous –
It’s unbelievable that it has gotten to the stage where we actually know without a shadow of a doubt that the U.S. economy is RIGGED! I can’t wait for the PONZI scheme to continue!!
Anthracite Futures anyone?.
Correct. Most ZH peeps missed this one when quizzed about events in the new year that were actionable. I think folk were all convinced that Ben Bernanke would fall down there stairs and not be there for municipal bond issuance, or something.
China is in trouble right now...no matter how hard the criminal syndicate Street tries to suggest otherwise. The commodity trade is in big doo doo. Oil will be the first commodity to demonstrate the doo doo situation.
Maybe, just maybe, I'll finally get the dip in gold I am looking for.
cdad
Yes please, need one more good dip in PMs before it all falls apart.
WOW just WOW - thanks for the article.
What a nonsense about 'China has been exporting deflation to the USA'. Yeah I'm sure Americans were complaining en masse that the things they bought were cheap. What has changed is the crash in the US housing market and now the US wants to make this problem the world's problem. Watch the Niall Ferguson presentation posted on Zerohedge last weekend and listen to what he says about 'hoping for a China crash'.
he meant deflation in quality not price.
Uncle Ben is doing absolutely everything he can to break the RMB away from the USD so US exporters will fair better. In doing so he is going to inflict huge inflation on US consumers of Chinese goods - basically every US consumer. Economic suicide. What a lunatic.
Is this really worth doing just to raise the velocity of money?
Here's a much cookier idea - this is bound to work: Why not re-nationalise GM, force the production of electric cars for individuals and businesses and then give everyone and new electric car. Renew the US transport fleet and leave the remaining gas for the heavy lifting trucks. Cost would be less than a $1Tr and would secure the failing US energy supplies long enough for the NIF to come on line and save us from feudal serfdom and agrarian simplicity.
The problem with "everyone getting an electric car" is not the car but the power supply. No country has the electrical generation capacity to handle millions of vehicles drawing down from the power grid. There simply is not enough infrastructure to handle this shift. Yes is could be built, but you would need to factor it into your cost expectations.
The electric car will not reduce emissions as power will likely come from coal generation plants. It would reduce our dependency on oil, however..
You need a plug - the infrastructure is there. There's much more that could be said on this. However, this is theory and not worth an argument. Thanks for taking the time and responding.
"Uncle Ben... ...is going to inflict huge inflation on US consumers of Chinese goods - basically every US consumer. Economic suicide. What a lunatic"
Higher inflation in the USA is Ben's publicly stated goal. Where was the outrage before? This is what Central Bankers do: inflate prices, reduce the value of the currency, and by doing so transfer wealth from the producers and savers to the financiers, bankers and other leveraged institutions.
I agree with you, that would work but the govt. never thinks that way. They think about what they can do to please their people or benefactors/lobbyists. If the US don't think that China's inlfation problems won't have an affect on the US, they are sadly mistaken.
Great report Jack H. Barnes. Makes me really regret selling my WLT and MTL. Coal in the Christmas Stocking this year would have been the best present.
i see.
Go long Coal OF Africa, great quality cooking coal and Mital hovering for years. Amazing how mother nature is always a game changer.
Nat gas is going to get a big drawdown next week when the coldest air in many years arrives from the N. pole. The computer forecasts had negative single digits F in Dallas late next week.
5 liters of soybean oil for $7.20? That is almost a US price, and our soybean oil doesn't have melamine or cadmium in it (I don't think).
Can it be made into drywall?
We use the ancient chinese secret of using formeldahyde in making drywall
interesting. nice read.
I am interested to see what this does to electricity cost in the US as coal rises at the same time NG is heading north.
+1
Great info.
Time to look for Indian Iron ore melters like Arcelor Mittal and go long ;)
Fab analysis. Bet you this Dude is not licking stamps and paying his bills with a $0.01 overpayment, baby.
Arcelor Mittal is not Indian. Most of its operations are in UK, eastern Europe and S America
Arcelor Mittal is not Indian. Most of its operations are in UK, eastern Europe and S America