Peter Medved's  Instablog

A number of new reports coming out of China & other industry & economic factors point to the Aluminum Corporation of China Limited (CHALCO) entering into a new growth phase, which has me looking at the ADR from a fairly bullish stance.

Chalco (NYSE:ACH), which is by far the largest domestic producer of finished aluminium & holds a national monopoly on alumina. It runs a national network of 34 subsidiary operations & has a 26.6% stake in Yunnan Copper, the second largest copper producer in China.

Abroad, Chalco has been very active on the acquisition front, in 2007, it acquired development rights in the Aurukun project in Australia, which will be coming online in 2011, which is slated to provide 6.4 mtpa of bauxite & 2.1 mtpa of refined alumina. 2008 saw it acquiring the Peru Copper Company for a snip at $860 million & along with it the development rights for Toromocho which is estimated to hold more than 15 billion tonnes of high grade ore.

Not all has been complete plain sailing, however,  as the company bought into 12% of Australia's Rio Tinto last year in partnership with Alcoa. But failed this year to acquire a further 18% for a chunky $20Bn after a shareholder revolt & Australian fears that Chinese companies were getting their hands on mineral assets at knock down prices.

To cap off the supply side, as we reported yesterday, it looks as though China has managed to secure access to vast bauxite resources in Guinea, the majority of which will go to supply Chalco refining & smelting operations.

Looking at the Chinese economy as a whole & at one or two of the sectors in more detail, I can see a building demand for aluminium starting in the short term.

China National News has reported trade figures for September that show a marked slowdown in exports, down only by 15.2% from September 2008. Considering that overall, Chinese exports have been on a decrease of around 31% for the year, this is a strong signal that Chinese manufacturing is back on the rise.

Figures released by the China Association of Automobile Manufacturers today, show that the auto sector is still enjoying sustained growth, with more than 1.3 million units being sold in September, a 78% increase on a year ago. So far 9.66 million units have been sold in China in 2009, a jump of 34% on the same period in 2008. With this continued growth in the sector, aluminium demand will also continue to grow in line.

In aviation, China has made some great advances in the last 10 years, moving from maintenance & repair, to engine manufacture & now construction of airliners. We have seen Airbus centre it's Asian operations for A320 assembly in Tianjin, alongside Eurocopter, whilst Beijing is investing over 10 billion yuan in an "aviation city" that will support aircraft manufacturers.

Domestic useage of commercial aircraft has seen astonishing growth this  year, with a 43% rise in passenger air traffic being registered. Now China is looking to build it's own flagship airline brand to take on incumbents Boeing & Airbus. State-owned Aviation Industry Corp. of China, (Avic) which is producing the ARJ21, recently predicted the country will need 3,796 new passenger planes by 2028 to keep up with domestic demand for air travel, adding to its present fleet of 1,191.

Need I say more ?

Authour holds a long position in ACH

Chinese interest in acquiring "strategic assets" continues unabated, with recent acquisitions & investments in a number of companies in Australia & South America.

As we saw in last weeks eye bullish approach regarding Nigerian oil, China is looking a little further afield & it's all seeing eye has settled upon Africa. In what is quickly becoming a replay of the late Victorian era "Scramble for Africa", the latest country to be courted is the Republic of Guinea as China seeks to gain access to the West African nation's large mineral deposits. Instead of glass beads, whiskey & cowrie shells, Chinese negotiators are offering eye watering amounts of money to be invested in infrastructure projects. 

The impoverished nation possesses more than 25 billion tonnes of bauxite ore, with more than 150 mineable deposits having been prospected to date. Additionally, Guinea's mineral wealth includes more than 4 billion tonnes of high-grade iron ore, significant diamond and gold deposits & as yet undetermined quantities of uranium. Bauxite exports account for more than 75% of GDP, according to Wiki sources.

Guinea's Minister for mines was quoted in the Financial Times as saying that the Guinean government is in talks with the China International Fund  (CIF) regards a $7Bn investment into a number of projects including infrastructure, minerals & oil.

"Instead of just giving natural resources... in exchange for promises of developing our infrastructure, we decided to take the joint venture approach and co-own not only the infrastructure development companies and projects, but also whatever natural resource companies or projects are developed jointly." said Mohamed Thiam "All the government's stakes in various mining projects will be put in that mining company. Future mining permits or concessions that the government decided to develop on its own will be put in that company,"

China still doesn't seem to be too picky regarding who it does business with, as the present Guinean government is a military dictatorship that has recently put down a bloody coup last month. 150 people were killed on September 28, when troops opened fire on a crowd  gathered in  the capital Conakry, in order to protest at ongoing corruption in Captain Moussa Dadis Camara's rule.

Sidya Toure, who leads the only effective opposition & is a former prime minister was quoted "I do not understand how you can believe that we can inject this kind of money into the economy of Guinea where the total gross domestic product is only three billion dollars."

CIF is also planning to form a consortium with the Guinean government & near neighbour Angola's state oil company Sonangol to look at prospecting for oil off Guinea's coast. As we reported previously, West Africa has become a hotbed of speculation & investment, as new oil fields are coming under development in Ghana, Angola, & Senegal. It is considered likely that offshore Guinea will also provide new hydrocarbon deposits that can be exploited.

What is interesting is that CIF on the face of things, does not seem to be an officially backed government company, whereas all the recent deals have been undertaken either by the Chinese Development Bank or via large state owned enterprises such as CNOOC or Chalco. CIF is registered in Hong Kong & an inspection of the website gives very little information on the structure of the entity.

Last November, as it became clear that the global economy was heading into a recessionary period, central government in Beijing implemented a 4 Trillion yuan/$586 Bn stimulus package, aimed at cushioning the blow of decreasing exports on the economy whilst also improving industrial efficiency at all levels, with energy receiving a special focus.

Adopting various measures such as tax reductions, rebates, fiscal subsidies, improved access to credit & direct government expenditure, central government has been encouraging state owned oil companies such as Petrochina & CNOOC to expand foreign investment in upstream opportunities, whilst increasing domestic refining capacity & oil product stockpiles.

We have seen a number of examples of this with Russia signing a 20 year $25Bn oil supply contract in February, which will see Rosneft supplying up to 300,000 bpd of oil via it's East Siberia-Pacific Ocean (ESPO) oil pipeline to China. This was closely followed by the China Development Bank extending a $10Bn loan to Brazil's state owned company Petrobras in return for securing strategic oil supply contracts & this month CNOOC has made a bid to acquire more than 16% of Nigeria's stated oil reserves.

It would appear that sentiment is currently running against Western based IOC's & countries in emerging markets that have currently untapped or underdeveloped  hydrocarbon deposits are enjoying the ability to play interested parties off against one another. What is interesting to me is the fact that China seems to be playing Guinea at arms length via what is in effecr a shell company, allowing them to hold up a clean pair of hands on an international basis.

This desire to secure resources at what would seem "any cost" should, in our opinion, receive close attention from both a geo-political & investment point of view. IOCs will not be able to compete in areas where there are no rules, particularly in Africa, whilst it looks like China will circumvent accepted norms using any available route to acheive their aims.

Author has no position in any company mentioned

Indian software & services giant Infosys has announced its results for Q2 2009 & has correspondingly raised its forecast for 2010 due to improved business from customers in the U.S.

Revenues for the period were $1.15Bn, down 5.1% on the same period in 2008 but a solid 2.9% increase on the first quarter. Infosys now anticipates revenues for this fiscal year to be $4.6 billion to $4.62 billion,  a  much more optimistic forecast than made in July.

Earlier this year, Infoysys (Nasdaq:INFY) had stated that it would look to retrench in it's domestic market & Asia, as business conditions in Europe & the US continued to deteriorate. So the upbeat quarter & CEO Kris Gopalakrishnan's bullishness have come as quite a surprise.

"In the second quarter, the overall business climate has improved. Clients are now looking to invest in a few strategic initiatives and relationships to maximize value from opportunities when the economic downturn ends"

Earnings for the ADS of the company are now expected to be in the region of $2.10, a 7% drop on 2008, however a much improved benchmark from July this year, when Infosys stated a potential overall decline in EPS by up to 12.5%.

Normally, companies that make U-turns on forecasts in the middle of the year tend to be broadcasting warning signals, however after a slew of negative messages, it is good to see Infosys are taking a positive track. Infosys is well known for being cautious on it's financial announcements, so any bullishness from Gopalkrishnan, should be taken at face value. As more than 60% of Infosys revenues are generated in the US, could this be a signal that the recovery is actually starting ?

No position