Chinese social housing – another reason to buy copper and iron ore  Macquarie Research,

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Chinese social housing – another
reason to buy copper and iron ore
 Macquarie‟s China economist, Paul Cavey, has published an in-depth report
on China‟s social housing project (The China Diviner – Social Housing, part 2,
28 June 2011). Here, we highlight the areas of Paul‟s report that potentially
impact on our commodity view and reiterate our view that construction activity
so far this year has been driven by regular construction activity and that a
stronger outlook for social housing over 2H11 and 2012 is very supportive of
our bullish copper and iron ore views.
Latest news
 Commodity and resource equity markets rallied on Wednesday, following on
from Tuesday‟s gains. While the parliamentary vote by Greece to approve the
austerity measures (which will see it receive the next tranche of EU/IMF
funds) will get the credit for the rally today, we identify at least five other
factors that have facilitated the move higher over the past two days.
 First it was the IEA moving to release oil reserves and place the oil price
under pressure, thereby giving an effective tax cut to oil consumers globally
and taking some heat out of the global inflation thematic. Then China
effectively declared the war on inflation „won‟ (Premier Wen) and released a
study that provided transparency on the local government debt situation and
suggested it was under control (China National Audit Committee). Less
reported but no less important from a commodity perspective was China‟s
move to allow local governments to borrow funds for the purpose of building
social housing.
 The final factor that appeared to facilitate this rally was that there was (and
still is, in our view) a lot of money on the sidelines – funds generally liquidated
positions or covered shorts across the commodities complex over the past
two months. It is our view that over the past two days this money has found it
significantly harder to justify not being more invested.
 Japanese industrial output rose by 5.7% MoM in May but was still down YoY,
by 5.9% YoY (from -13.6% YoY in April).
 Latest data from Cochilco of Chile shows diverging trends for mine production
of copper and molybdenum over the January to April period. Total Chilean
mined copper output was 1.7mt, down 1.4% YoY, while total molybdenum
mined output was up 33.7% YoY to 30.8m lbs. Looking at exports of copper
and molybdenum products gives a slightly different picture, with exports of
molybdenum production rising only 0.9% YoY to 27.6m lbs, while exports of
all copper products (refined, blister and concentrate) were down 11.2% YoY
to 1.6mt (Collahuasi port loader failure was an issue for copper). Copper mine
output by Codelco was up 7.4% YoY to 552,700t, while production by
Escondida fell 12.1% YoY to 303,100t. Collahuasi mine output fell 18.5% YoY
to 154,200t, and Antofagasta‟s output was up 9.7% YoY to 130,900t.
 David Brown, chief executive officer of Impala, said on Tuesday that
“investors, the traditional suppliers of risk capital to [the PGMs] industry [in
South Africa], are getting cold feet.” “The risk associated with future
investment in South African mining has increased considerably, as seen from
the outside world” because of dangers including nationalization, Brown stated.