Raw Material: Who Is Benefiting from China's Rising Demand?

In the last three months, China is importing more and more raw materials, such as copper, iron ore, steel, nickel etc. The China PMI index rose the second time in a row. According to a news briefing on Monday, China's electricity consumption in Janunary was also rising by 4.4% compared to same period in 2008. It is clear that more signs are pointing to recovery in China. There has been a significant rise in Chinese demand for refined Copper imports since the last three consecutive months. Imports reached a record 211,527 tonnes in December 2008, up 89 percent more than December 2007 and 49 percent higher than November 2008. Many analysts are starting to believe China's stimulus package is working as planned, which signals to investors that US $787B stimulus will also work.

OK, Who is doing raw material business in China?

Rio Tinto (RTP), The company's products include aluminum, copper, diamond, coal, uranium, gold, borax, nickel, zinc, lead, silver, borate, potash. The company operates worldwide with a primary focus in Asia and North America. Its Asian division sees strong growth from China in the recently years. The compay is well positioned to benefit from China's first recovery in this recession as a world power.

Cliffs Natural Resources (CLF), The company produces iron ore pellets and supplies metallurgical coal to the steelmaking industry primarily in North America and Asia. The company also owns Portman Limited, an iron ore mining company in Australia. In addition, it has a 30% interest in the Amapa Project, a Brazilian iron ore project; and a 45% economic interest in the Sonoma Project, an Australian coking and thermal coal project. In the recent Q4 earning call, the company said: "we are maintaining the operating levels at over 8 million tons of production as we are seeing signs of demand on a customer-by-customer basis in China". The company realized a 73% increase in revenues from Asia-pacific, mainly from China. Also recently the company has reopened West Virginia coal mines as ore inventory comes down and demand is coming back.

Freeport-McMoRan Copper & Gold Inc. (FCX) The company engages in the exploration, mining, and production of mineral resources. The company's portfolio of assets includes the Grasberg minerals district in Indonesia; mining operations in North and South America; and the Tenke Fungurume development project in the Democratic Republic of Congo. FCX does not have mines in China, however with copper price firming in recent months and China demand rising steadily, FCX should be well positioned to benefit from China's stimulus package in 2009.

There are some other AG commodity plays which have a China connection, such as Potash (POT), Monsanto (MON), Mosaic (MOS). But these AG names are still unclear if they can benefit from China because China has not had a food shortage since 2003. So the upside may be limited.

Disclosure: no positions

Comments

[Chris-africa:]

This is a spin story.The shipping agents volume are down scrap demand is at it`s lowest and people say China`s metal demand is up!I can`t see how and don`t know of any big projects in China.I????

Mar 11 08:56 AM

[Value:]

China takes a very long term approach; they do not worry about indices or meeting monthly numbers in order to get their bonuses. They are taking advantage of bargain-priced commodities, to inventory for their future infrastructure needs. An excellent value move on their part.

Mar 11 11:18 AM

[Rohan C. Pease:]

My worry about CLF is they paid too much for Alpha Natural Resources when coke, coal, etc were at all time highs. Their valuation of Alpha were based on spot prices for those inputs for steel. In short they overpaid for resources at the top of the cycle. An Iron ore miner worth looking at is Fortescue Metals Group (FSUMF) they are the third top producer of Iron ore in Australia, behind BHP and RIO. They spent capital to build their own rails from their mines to Port Hedland, therefore they have an advantage as BHP and RIO must share rail capacity. Also Fortescue's contracts are 100% in China, they are a China Pure Play.

Mar 11 12:41 PM

[Rohan C. Pease:]

Clarification: RIO in my post refers to Rio Tinto ticker (RTP), not to be confused with Brazilian iron ore miner CVRD ticker(RIO).

Mar 11 12:43 PM

[Chris B:]

Are we sure this isn't a seasonal effect? Isn't production for Christmas about to gear up? I assume this was looked into.

Mar 11 03:06 PM

[Tripitaka:]

Dude, as a major iron ore exporter CVRD is as tied to Chinese demand as Rio Tinto (or BHP for that matter). But you are something like five years too late for the "rising demand of China" story. At the moment the story is "cross our fingers that some centrally planned economic stimulus will allow demand in China to recover to something close to what it was nine months ago".

Mar 11 06:43 PM

[urbanhiker:]

Hey Rohan, CLF did not buy ANR. Time to turn the clock ahead.

Mar 11 07:13 PM

[j_remington:]

this has rehashed how many times?

Mar 11 07:43 PM

[mwfall:]

best one of all is thompson creek tc. here's an article:
www.metalbulletin.com/...

Mar 12 02:27 AM

[Mr. Ed, Jr.:]

"Many analysts are starting to believe China's stimulus package is working as planned, which signals to investors that US $787B stimulus will also work."

There is not nearly enough evidence for investors to reach that conclusion, even if the stimulus programs and surrounding conditions were comparable.

China may be a little better at focusing their stimulus package without loading it up with pork, since there isn't much need to worry about how the next election will turn out.

It also does not necessarily follow that the US stimulus will succeed because the China stimulus may be creating small upticks in electicity usage. Or, that for reasons unknown, the Chinese are increasing imports of raw materials. There is massive rebuilding to be done in the Sichuan earthquake zone, and it certainly should not surprise anyone if China was stockpiling cheap commodities.

Mar 12 03:42 AM

[expat in China:]

The war is an economic one and make no mistake about it, the China stimulus comes from the same pot as the military spending and it is for China domestics material needs and its exporters!

An example is the part of the stimulus that will provide direct electrical power to the Chinese aluminum producers. Yes, not through the pricing grid or in the power usage reports but direct from the mother to the child to beat its western rivals.

Long term planning to consume one industry after another.

Mar 12 05:00 AM

[Philly Jim:]

Meanwhile, U.S. corporate executives lavish themselves with tens of millions while the Congress takes their vacations and concentrates on their own reelection campaigns. It's apparent that China will become much more powerful than the U.S. if Americans continue to tolerate a "do nothing" Congress and corporate pirates.
As for the article, inflation is coming!


On Mar 12 05:00 AM expat in China wrote:

> The war is an economic one and make no mistake about it, the China
> stimulus comes from the same pot as the military spending and it
> is for China domestics material needs and its exporters!
>
> An example is the part of the stimulus that will provide direct electrical
> power to the Chinese aluminum producers. Yes, not through the pricing
> grid or in the power usage reports but direct from the mother to
> the child to beat its western rivals.
>
> Long term planning to consume one industry after another.
>

Mar 13 01:21 AM