China Commodities Weekly - NDRC renews its efforts to close down obsolete steel capacity

Last week, National Development and Reform Committee (NDRC) urged local governments to develop a list of outdated steel mills to be demolished. According to the NDRC, China will close 100m tpa of capacity over the next five years, with 55m tpa planned to be closed in 2007 alone. The north of China and the east of China account for 81% of the nation's outdated iron production and roughly 60% of outdated steel production. The provinces of Hebei, Shangxi, Jiangsu, Shangdong and Henan have become the key target areas for restructuring.

The latest Australian trade data through to October shows a strong recovery in Australian iron ore exports from the cyclone-affected levels of earlier this year. As would be expected, China has dominated the growth in iron ore exports and now accounts for just over half of all Australian exports. Exports of iron ore from Brazil to China rose 21.3mt YoY in Januaryctober, while Australian exports rose only 9.9mt YoY, reflecting the stronger growth in Brazilian production this year.

The export coke price FOB Tianjian port has reached $165/t this week, up from $155/t a month ago and a low of $120/t at the beginning of the year. The latest increase follows the announcement from the Shanxi government at the beginning of November that the railway system is to only undertake coke transportation from a designated list of approved coke producers. With Shanxi accounting for 30% of Chinese coke production, these measures have caused a tight export coke supply over the past month, leading to destocking of coke at ports and an increase in export prices.

Last week, Macquarie attended the 2006 China Aluminium Forum held in Nanning, Guangxi province. Meetings at the conference highlighted a still-bullish sentiment toward demand growth (20%+ expected again next year), but a general belief that with production growing at least as strongly, exports (of products, at least) will increase further. There is speculation of some increases in aluminium inventories in warehouses in China, although we have only been able to firmly identify about 60,000t of metal in port stocks. It certainly does not look as though hundreds of thousands of tonnes of metal is just lying around.

The Shanghai copper market continued the downward trend from last week, falling to Rmb65,010/t ($8,126/t) by Friday's close, a decrease of Rmb790/t ($99/t), or 1.5% over the previous week.