Material Matters: Copper, China’s Property Tax And Coal

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-Copper surplus likely to worsen
-Chinese property tax will widen
-The tax will affect copper consumption
-Galilee Basin coal rail and port in view
 

By Eva Brocklehurst

A proper cup of coffee from a proper copper coffee pot. If you can get a handle on that saying you probably can handle the fortunes of the copper price of late.

Copper's price rose 1% over the last week to US$7,622/t and inventories also went up at the London Metal Exchange by 0.9% to 5,025t. Macquarie, citing these facts, believes the copper surplus that's now in frame has all to do with sluggish demand, not surging mine supply. The analysts note that all the mine supply growth from last year was exported to Chinese smelters via copper concentrates. Seasonality and improving demand should enable the inventory to fall in the second quarter but that may be temporary. Without a stronger lift in Chinese consumption the surplus is expected to worsen by the end of the year.

Macquarie argues that weaker demand, not higher production growth, is the reason for the surplus. Overall, the analysts believe copper consumption contracted in the last six months. Moreover, the largest driver of inventory changes on the LME is Chinese refined copper trade, prone to large stocking up and then de-stocking. Macquarie notes Chinese refined copper imports have been falling for a year, leaving producers to export refined copper to the US or Europe, despite a drop in demand from those quarters.

China has also exported refined copper, driving an increase in metal availability outside China. Since October, China has been exporting over 20,000t of copper per month, because of a combination of lower tolling export taxes and a negative price arbitrage, Macquarie maintains. These exports have driven the increase in LME inventory in Asia, with warehouse operators paying higher physical premiums to secure volume and rental yield. Macquarie thinks Chinese industrial data and bonded warehouse stock levels will be the most important factor for copper prices in the coming months, with other major consuming regions unable to rebalance the market.

Citi also thinks China has a significant surplus of copper, far more than just a build up in warehouse inventory. Primary and secondary copper unit availability in China in 2012 was 10.96 million tonnes, comprising 3.4mt in primary copper imports, 1.6mt copper in scrap, and domestic refined production of 5.96mt. The Chinese property sector accounted for 20% of Chinese refined copper consumption in 2012 and has been a substantial source of copper consumption growth.

Citi expects increased government restrictions to speculative property purchases will contribute to softness in manufacturing growth rates. The analysts had expected Chinese copper consumption to grow by 7.5% in 2013 but now expect that to be more like 5.9%. Citi believes weak manufacturing, strong Chinese primary copper exports, rising copper inventory and improving mine production will weigh on the copper price short term.

Speaking of China's property market. BA-Merrill Lynch expects a roll out of a property tax nationwide from 2016/17 and this should be a long-term negative for the market. The government's stated desire is to cap excessive property demand. Shanghai and Chongqing are testing a property tax at present. In the analysts' view, the current scheme is cumbersome and difficult to implement.

The proposal suggested by Vice Minister of Land and Resources, Hu Cun-zhi, at a recent forum has the Merrills' tick. He suggested a property tax on home ownership beyond two units, seeing the way to address property inflation by dampening investment demand rather than increasing supply. Merrills suspects the government is connecting major city property ownership databases ahead of doing more on this front, noting excessive savings is the main problem, as there is a huge desire to save via owning properties. The analysts believe a well-designed property tax would be one of the more productive reforms the new government could make.

On the subject of coal, Aurizon Holdings ((AZJ)) and GVK-Hancock are investigating a 60Mtpa rail and port project to develop the Galilee Basin, Queensland. The rail would be located within the state government's preferred rail corridor and provide open access. The companies estimate the rail and port infrastructure will cost $6bn and deliver capacity of 60Mtpa. UBS has taken note of the plans and estimates an incentive price of $111/t for Newcastle benchmark coal is needed for the project to be economic. The coal is expected to attract a 5-10% discount to Newcastle benchmark, in the analysts' view. UBS notes, while Galilee may have economies of scale, stripping ratios and washing yields are similar or worse than other areas. Should the rail and port go ahead, the analysts believe the commercialising of the basin would be positive for those companies that possess a resource there.

Coal stocks UBS flags for watching are Bandanna Energy ((BND)) and Guildford Coal ((GUF)). Bandanna's 50% interest in the South Galilee project comprises 589Mt. Crystallising any value for Bandanna's South Galilee project would be positive for the stock, as the broker believes the market is attributing zero value to the South Galilee resource at the moment. The take is much the same on Guildford Coal, which has projects in the northern part of the Galilee. Guildford is unlikely to take advantage of Aurizon/GVK-Hancock's rail network but is actively investigating transport solutions, along with Asciano ((AIO)). Guildford has a total resource of 1,678Mt in Galilee. Again, this hasn't been factored in to the broker's base case valuation on the stock.
 

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