Connecting the Dots in China

A common thread runs through the morning’s headlines. And since we were still under the spell of Lady Justice, we have to thank Dave Gonigam, who himself escaped unscathed from her grasp earlier in the week, for sifting through them.

The thread, once again, loosely weaves its way around China:

  • China’s exports rose 48.5% from April to May, the biggest monthly jump in six years. Since that signals continued demand from American and European customers, the news propelled the major US stock indexes up 1.7% on the open
  • China once again denied rumors that it plans to cut its euro-denominated forex holdings. That put a floor under the euro, for the moment anyway, at $1.207
  • Treasury Secretary Geithner is once again grousing to Congress about the dollar-yuan exchange rate.

Of course, you don’t read The 5 for a roundup of the headlines. Any damn fool can drudge those up. Let’s dig deeper for the real signals China is sending this week.

More and more, China is the country that moves markets everywhere. That’s why we were in Beijing evaluating business opportunities earlier this month. That’s why Chris Mayer came along… to see if the bubble in China is real and to look for real opportunities for readers to invest in.

Likewise, it’s why Morgan Stanley Asia Chairman Stephen Roach is cautioning Sec’y Geithner this morning to “be careful what you wish for.”

China is just one of 90 countries with which the United States runs a trade deficit, Roach points out. If China revalues the yuan, that just means China’s share of the shortfall becomes smaller.

“China is going to move to a consumer-led society,” Roach writes. “They are going to absorb more of their surplus savings and have less of that to send our way to fund our excess consumption and our deficits in the United States. Who is going to pick up the slack?”

Roach says when he raises this question, the usual comeback is, “What else are they going to do with their money?” The answer is they’ll invest in their own industries and infrastructure, and build more of that consumer-led society. They’ll invest in raw materials and resources around the globe and feed that beast on their own.

Indeed, because of Chinese demand, coal is now a bigger player in the world’s energy mix than at any time since 1970.

The annual BP Statistical Review of World Energy says Chinese coal demand grew 10% last year (and India’s, 7%). As a result, coal now makes up 29% of world energy use.

The most remarkable part: The amount of coal burned worldwide during 2009 actually fell from the year before. It’s just that everything else – oil, natural gas, nuclear, hydro – fell even more.

For the first time since 1982, overall world energy demand fell. (The drop in natural gas use set a record.) But in China, consumption is up. Way up.

“Consider that in 2000,” says Chris Mayer, “China used about as much coal as the US. Here we are 10 years later, and China consumes three times as much as coal as the US.”

“After being self-sufficient in coal for years, China has begun to import coal. This year, it will import 150 metric tons, which is double last year’s total. It may seem a molehill compared with what it burns, but that molehill is about 60% of Australia’s coal exports – and Australia is the world’s largest coal exporter – and growing.

“This means,” according to Richard Heinberg of the Post Carbon Institute, “if Chinese imports double again next year – not an unrealistic scenario – China will need to import more coal than Australia can currently provide. One more doubling of import demand and China will be wanting to import 600 million tons per year, about the total amount of coal exported by all exporting nations last year.”

Of course, it’s not just coal that China needs. It needs oil, natural gas, uranium, you name it. Now that Chris has had a couple of weeks to decompress from our China trip, he’s just assembled a special report for his premium service, Mayer’s Special Situations, packed with eight recommendations.

Of course, there are contrary signals too. China’s largest publicly traded steel maker has just cut prices for the first time in eight months. This is extraordinary when you consider the news we brought you two days ago – about how iron ore prices now sit 147% higher than during fiscal 2009.

“Some steel producers are already tottering on the brink of losses,” Zhang Lin, a Beijing-based steel analyst, tells China Daily. “They will have to make output cutbacks or resort to maintenance shutdowns, if the prices continue to fall.”

Addison Wiggin
for The Daily Reckoning