China growth outlook – is anyone concerned?

The Federal Reserve Bank of San Francisco published a recent review (‘Is China Due for a Slowdown‘) of the Chinese economy and whether  we can finally expect a slowdown. The summary reads “While average income in China appears to be headed towards levels that have been associated with growth slowdowns in other countries, high income inequality between wealthier coastal provinces and the less-developed interior suggest that deceleration may not be severe”. So is this good or bad news? As to the consumer story, we look to the US and Asia’s regional consumers in a little more detail below.

Further we read the Goldman Sachs A-Share piece with great interest. In its recent update, Goldman Sachs suggests the following companies, among others, as a Buy-Rating:

– Baosteel – Steel company
– Beijing Capital – Real Estate Developer: Residential, Office, and Commercial in Beijing
– Better Life – Supermarkets
– BlueFocus – Public Relations
– Fiberhome – Telecommunications
– Hualu-Hengsheng – Chemical manufacturer
– Industrial Bank – Industrial Bank, Top 10 in the country
– Jiangsu Yuyue – Medical Equipment
– Jizhong Energy – Coal products
– Ping An (A) – Insurance
– SAIC – Automotive
– Yantai Wanhua – MDI manufacturer, largest in the region

Other stocks that offer a potential upside (on current share price) are Lushang Properties, Jiangsu Zhongnan Construction, China Merchants Bank (A), Shenzhen World Union Properties and Zhejiang Yankong Group.

While this list is interesting and gives a broad range of exposure to various sectors, it masks the wider implications that currently drive the regional and global economy. Access to the these companies is restricted to many investors. Therefore other proxies may serve as an indication of what is truly happening in the region. Below, we take a look at the state of the domestic Chinese banking sector, the regional and global consumer sentiment as gauge for current consumption trends.

Deloitte commented in a report on China’s Banking Industry in its 2012 outlook. The conclusion of the report starts by stating:

“The banking industry of China faces challenges on many fronts – to asset quality, non-performing loan levels and liquidity, to name a few. Emerging risk is perhaps the greatest challenge. With the expected
slowdown in domestic economic growth and weak external demand, new risks in the industry are growing. Industry risk is being controlled, in part, through greater regulatory scrutiny, monetary policy easing, and
local debt approval. The reform of rural financial institutions continues to move forward, further supporting growth in “Agriculture, Farmers and Villages”.”

We couldn’t agree more. The transition from an inward looking banking sector towards an industry that strives to be part of the globalization effort will take time but the forces are at work. Not only is the sector catching up fast, it will certainly lead in a number of segments not before long. The easing of the RMB exchange rate ‘gridlock’ is likely to enable a more balanced approach by its domestic banks in line with investor expectations both domestically and internationally. The domestic banking sector certainly must get its act together to avoid any of the fallacies of earlier decades. Nonetheless, while the housing sector is overheated for some and therefore poses a significant risk, the individual consumer is still striving and aspiring to developed market levels.

To balance our (global) view, we explored KPMG’s US Retail Industry Outlook Survey (2012) to look for evidence that spending on the domestic, eg consumer level, are intact and demonstrate signs of robustness despite the gloom in the global economy. After all, someone has to spend their income for (consumer) goods and thus make the trade to go round; if not the Americans who else we ask. The authors of the report conclude “…retail executives expect the industry to proceed on a path of gradual growth over the next year, supported by continued modest gains in revenue and hiring. Concerns over the US economy are evident, as many executives have pushed back their expectations for a substantial recovery until 2014/2015 or later. While waiting for the recovery to take hold, sector executives are focusing on spending the cash built up on their balance sheets by investing more over the next year in information technology, including data analytics and digital marketing channels.” This makes an OK reading and does not worry us too much as we would expect some level of re-balancing at the individual consumer level. But signs are certainly pointing sideways if not upwards over a medium term view.

PwC - 2012_Retail_Consumer_Products_Asia_Chart16

PwC: 2012 Asia Retail and Consumer Products, Chart 16

The Asian regional consumer behaviour is certainly becoming an ever more important factor as far as the decoupling from the developed world versus developing world is concerned. PwC put out a report entitled 2012 Outlook for the Retail and Consumer Products Sector in Asia and hits the nail on the head. Numbers in China are always big and staggering but these do not change the fact, there are what they are. China’s spending on Food, Beverages and Tobacco will double during period 2011-2015 potentially achieving US$1.4tr in sales. It is thus interesting to note that China has only 2.5 hypermarkets per million people. France, the US, and South Korea have 25, 12.3 and 7.6/ per million respectively. The conclusion is obvious.

In a nutshell, the consumer story in Asia appears to continue to gain traction. Although some believe it is slower than analysts had forecast, it is still a momentum that is gathering pace. And if the classical S-Curve is anything to go by, Asia will soon have a major impact on corporates that serve the regional consumers.

We look at the global conglomerates that can serve the market (Unilever, Kraft, Mars, Procter & Gamble, Johnson & Johnson, L’Oreal, Walmart, Carrefour, TESCO, Metro to name but a few), have the capabilities to develop regional if not local strategies, and the capital to have staying power when things get tougher than anticipated. A clear road map is certainly required to take on these markets. Entering them all at the same time, may just a little bit too challenging for most.


Water – Where is the money?

Deutsche Bank’s piece on the Water sector (World Water Markets, pdf) presents an interesting read. Following on from our research Water Scarcity – An investment Opportunity, Deutsche Bank echoed some of our thoughts. In particular, two areas stand out.

First, the agriculture sector plays a vital part within the water value chain. We maintain our view that ‘water efficiency‘ remains the primary factor in extending the use of fresh water. Further, the challenge with respect to putting a price on water is discussed in the DB paper although no clear recommendations are being made how to overcome the conundrum.  We previously looked at tradeable water rights, Full Cost Recovery, and Polluter Pays Principle and suggested areas for thought how to establish a market mechanism.

Second, Deutsche Bank raises the issue of how to find credible investments in the water sector. KPMG, also, put out a research report that looked at private investments in water infrastructure (2008, pdf). Although the primary investment focus in both reports is on water infrastructure, we are not comfortable with the likely returns that may be earned in this space. Specifically, the requirement for sewage plants may be interesting but the returns to be earned will likely mimic utility and/or project finance like returns. The high up-front capex is something we normally shy away from. Rather, we look at the technology side of the investment theme and focus on efficiency plays. Deutsche agrees: “A large range of technologies is needed. The demand for efficient irrigation technologies, seawater desalination and sewage treatment facilities, technical equipment (e.g. pumps, compressors and fittings), filter systems or disinfection processes (e.g. using ozone or ultraviolet light) and efficient sanitation facilities will probably pick up sharply.”

Another area that we explored a while back are the business and management issues for companies based in India and China that lack access to fresh and/or clean water. For investors who like to look at the state of the Chinese Water sector and how to potentially participate, we recommend KPMG’s report ‘The Water Business in China – Looking below the Surface.’ In a nutshell, the report explores ways to participate in the urbanization and how to invest in Joint Ventures at the Municipal level. JPMorgan explored business risks associated with water access in their report ‘Watching Water – A Guide to Evaluating Corporate Risks in a Thirsty World‘ which extends our thoughts from our Water Scarcity piece above. We mentioned a glass and pharmaceutical company which admitted that they were accessing ground water deeper and deeper under ground every year. At which point, does this become a clear cost and business risk issue?

We note that Fidelity Investment Managers has put a note out on the their take on the water sector; better late than never one might say. There isn’t anything new or jaw-dropping in the report, Fidelity lists the usual investment ideas such as Veolia, Hyflux, Doosan Heavy Industries, Jain Irrigation Systems, General Electric, HaloSource (recently IPO‘ed) and RusHydro as potential investment targets. We previously eluded to the fact that although GE only generates a single digit portion of their group revenues from water, in absolute terms these revenues ($2.5bn+) still rank them as a Top 10 water investor and supply chain player in the world.

Update: A list of some water ETFs can be found here.


Instead of Clean Technologies- let’s talk oil. Why? Because oil competes with clean technologies, affects government and consumer choices and in large part determines the success or lack thereof of much of what we discuss here. Consumers are much more willing to pay premiums for electric vehicles, biofuels or renewable energy if it does not have the burdensome variable cost of crude oil attached.

Many well qualified geologists and experts are claiming that the Earth has already given us her easy to find oil and that we have peaked.  See this video for a good summary. Probably the most famous detailed review of our Earth’s supplies can be found in Matt Simmons’ book “Twilight in the Desert” or also in Jared Diamond’s “Collapse.” Peak oil is a controversial idea to many that draws passionate disagreements from those in the oil industry. Let’s take a more reserved approach to this giant question with facts we can understand much easier than how much oil exists miles beneath the surface: Oil Demand.

Fact #1: If oil demand outpaces oil supply, more people bid for the less per capita supplies. Oil prices increase.
Fact #2: We all know the global population is increasing but that’s not the issue. What matters more is that the per capita oil consumption is increasing. Developing countries, are- developing.

Population projections

Fact #3: If oil supply is to continue to increase, it’s got a lot of work to do to replace maturing oil fields. If it can increase, good luck keeping pace with demand. The IEA has been warning about sluggish supply growth, and if Saudi Arabia has so much oil in reserves- why are they spending billions to drill off shore now?
Fact #4: Oil prices have remained constant, at relatively higher prices during one of the world’s worst recessions in memory. Imagine what price it would be if oil demand had not actually dipped two years in a row! Where do prices go when the economy recovers, never mind the other above issues? Demand down 4% in 2009 and 5.4% in 2008. We have no substantial reason to believe that demand won’t recover when the economy does.

Rebuttals: What about horizontal drilling, new discoveries and those Canadian Oil Sands? Those are accounted for in the both the IEA and all three studies linked to in the first paragraph of this blog. Secondly- if the Canadian Oil Sands are depended upon as a significant source of future, global oil supplies- then we’re still in very bullish oil pricing territory given the very high variable cost to procure a barrel’s worth of oil from Alberta.  And that ignores the logistical and environmental issues of the oil sands. See the Cambridge Energy Research Associates supply curve posted below. The easy oil has already been found. The expensive oil is now depended upon to take up the slack of a flat supply curve.

Projected Global Demand. Source: EIA

Conclusions: Oil prices are bound to increase significantly. The price of oil largely affects the economics (consumer choices and firm profitability) of many CleanTech related firms in areas of electric transportation, electricity generation and energy storage.

Chinese Consumption increasing faster than population

Think of oil consumption occurring by two different groups of people- those from developed countries (4.7 bbl/day) and those from developing. As countries develop, so do their consumption rates. Welcome China, India and Brazil to the developed world (slowly!). Again, while very few people have the information, expertise and experience to speculate on global oil supplies, it is much easier to grasp the demand side and consequently oil pricing and its impacts.

I strongly suggest the above two books by Matt Simmons and Jared Diamond for anyone with a relevant career in Clean Technologies or even just Energy.

Coincidentally, a documentary is being released today covering this exact topic and is receiving great reviews. It is called “Collapse” and is narrated by Michael Ruppert. See reviews here and here.

Courtesy of the Oil Drum

The easy, cheap oil has been found. (Courtesy of CERA)

The Great, Fake Lithium Supply Scare

“But there’s not enough lithium for all those batteries- and now you’ll switch dependency to a few lithium supplier countries!” That is the claim less informed journalists and hacks often make when they need a counter point to balance their first article on the emerging, electrified transportation sector. Why do we care? Because if true would significantly affect the battery, transportation, grid storage and electronic appliance sectors. Let’s try a fact check:

1) Claim: Dependency on 2-3 countries for lithium (similar to oil dependency)
False. This table from the USGS best answers this claim:

Country Reserves (000’s ton Li) Reserves Base(000’s ton Li)
Argentina 2,000 2,000
Australia 170 220
Bolivia NA 5,400
Brazil 190 910
Canada 180 360
Chile 3,000 3,000
China 540 1,100
Portugal NA NA
USA 38 410
Zimbabwe 23 27

Plus, ore deposits in these plus other countries bring the total to over 17.1 million tons of reserves.

2) Claim: Lithium is the sole material these sectors must have to advance.
Yes and no. Shorter term most known batteries for next gen autos and electronics will use lithium (bar the also popular nickel metal hydrides.) Longer term- let us not ignore 15 start ups that are readying ultracapacitor break throughs, 27 manufacturers and 29 other companies that have recently developed ultracapacitor technologies plus 52 research institutions working on advancing ultracapacitor technology. We do concede however that lithium will play by far the largest role for at least the next 15 years.

3) Claim: All of the suppliers in the world won’t be able to keep pace with demand & thus prices will skyrocket.
There are an estimated 17.1 million tons of contained Li in reserves worldwide. In 2008, total global demand was 100,000 tons and of course projected to grow significantly. Lithium can be recycled. Do the math with your own assumptions and it appears we have a few years before supply concerns arise. One may even want to account for new, future reserves of Li to be discovered.

Additionally- advances in nanotechnology as noted here, here and here are making the current battery chemistries that do incorporate lithium much more powerful, economic and robust.

Let’s make money: 77% of lithium carbonate currently comes from 3 companies which are SQM of Chile, Germany’s Chemetall and FMC of the USA. Talison Minerals, a private Australian firm, is the largest spodumene producer and accounts for about 23% of global contained lithium. However, only 15% of this production is sold into the lithium chemical markets via Chinese lithium carbonate converters. (Special thanks to Dundee Capital Markets for the above research, “Lithium- Hype or Substance?” October, 2009. )

Conclusion: If you are bullish on the technology advancing, you likely believe the improved economics offered by advanced lithium batteries will enable stronger investments in the related sectors of grid storage, consumer electronics, military applications and of course transportation. The sky is falling claims should not play a role in any related investment decisions.

China the New OPEC for Rare Earth Elements?

If it is a daunting thought that the OPEC controls 40% of the world’s crude oil supply, think again. China has 95% of the world’s rare earth elements (REE) leading the late Deng Xiaoping to presciently remark that “the Middle East has oil, but China has rare earths.”

While oil gets a lot of attention, what does REE have in relevance to consumers? REE, which include 17 hard-to-pronounce names of chemical elements (e.g. praseodymium, yttrium, europium, dysprosium, erbium), are important ingredients in many high-tech devices and clean technologies. You need them in iPod, laptop, cell phones, TV, hybrid cars, batteries, wind farm facilities, military applications etc.

Until the mid-1980s, a single US mine was the world’s main source of REE. It was shut down due to environment concerns and low prices and China cornered the market. Outside of China, there are 3 big potential sources of REE – in California, Canada and Australia. The California mine has not produced since 1998, the Australian mine was due to start production in 2011 but has just lost its financing and the Canadian mine is aiming at 2011. Together their annual production could amount to one third of China’s.

It is no surprise then that Chinese companies have bought stakes in the Australian and Canadian projects but were so far unsuccessful in buying the Californian project. China’s State Council, or Cabinet, recently was considering tightening export restriction or even banning the export of certain elements and closing mines. While this will increase prices, secure supply for its own needs and create jobs for its own people, this will cause fear among foreign companies and governments as they may not have access to the metals and this will lure more foreign companies to the country to set up manufacturing plants there.

But foreign and Chinese industry sources doubt Beijing’s dominant goal is to create an Opec-like price cartel as China has flooded the world market with cheap REE for more than a decade. Now, Beijing needs to ensure that it has enough materials to grow its own advanced and clean technology industries, especially in Inner Mongolia where it contains 75% of China’s REE deposits.

However, foreign companies and governments know that if the supply is suddenly stopped, production outside of China will be stopped as well. While the Pentagon has raised alarm over the US military’s vulnerability in the event of an armed conflict with China, the US has been slow in focusing on securing the supply of REE as compared to its supply of oil. Meanwhile, the Japanese firms such as Sumitomo Corp and Toyota Motor Corp have begun developing alternative sources of REE in Kazakhstan and Vietnam. The Japanese has great incentives to explore new sources and diversify its supply risks because it imports over 90% of REE from China. It would be interesting to see how these countries’ resource strategies will work out in this new century.

Will China Tighten ‘Rare Earth’ Grip?
China predicts rare earths shortage
Beijing may tighten grip on rare earths

China and India should not follow the West?

A new level of Sino-Indian relationship has taken place in the arena of environment. In Apr 2009, India and China told the UN a climate change agreement that slows down their economic growth and locks them into poverty is unacceptable to them. Both countries have taken a series of “ambitious” domestic actions to combat climate change but want to draw the line at anything that would upset their economic growth strategies. India and China are among 190 countries that are trying to agree a successor agreement to the Kyoto Protocol on climate change by the end of the year in Copenhagen.

There have been calls for both China and India not to follow the Western economic development model but follow a more sustainable path. What kind of models to follow? I checked out this model called “sustainable development“,  termed by the Brundtland Commission 1983 by UN, which is a pattern of resource use that aims to meet human needs while preserving the environment so that these needs can be met not only in the present, but also for future generations.

The West followed the “grow first, clean up later” strategy which is commonly depicted by the “Environmental Kuznets Curve” (EKC), named after Nobel laureate economist Simon Kuznets. It shows that in the earlier phase of economic development, no or little attention is paid to environmental concerns. After a threshold, when basic needs are fulfilled, interest in attaining a clean environment rises. The developing economy of China has been cited as a potential test case for the EKC. Although China and India have been urged not to follow this route, both countries are asking the West to sponsor them in achieving sustainable economic growth. Rich countries should lead the way in cleaning up the world since they started polluting it, both countries claimed.

In another friendly gesture, India and China are in talks to monitor the melting of glaciers in the Himalayas together. The border region crucial to both countries’ water supplies are sometimes called the ‘Water Towers of Asia.’ Scientific research collaboration would see both countries share information. India has disputed the “doomsday predictions” linking melting of Himalayan glaciers to climate change, saying there is no evidence to support that glaciers will disappear within 40 years.

You can read other reports like “The Great Paradox of China: Green Energy and Black Skies” which describes China as on its way to becoming the world’s largest producer of renewable energy and yet is still the most polluted country; and John Doerr of Kleiner Perkins and Jeff Immelt, CEO of GE’s co-editorial in The Washington Post on “Falling Behind On Green Tech.” which laments that US is falling behind the green curve, compared to, can you believe it, China.

I picked the top 5 from 10 facts in the Allianz website here and here and other sources:


1. China is the world’s largest emitter of greenhouse gases. The Netherlands Environmental Assessment Agency says this milestone was reached as far back as 2006, when Chinese emissions reached 6.2 billion tons. Just 6 years ago, China’s national carbon emissions were still only 42% that of the US.

2. Despite China’s status as the world’s biggest carbon emitter, average annual per capita carbon emissions are substantially smaller (6 tons of carbon emissions) than in the UK (11 tons) and the US (25 tons).

3. 64% of China’s energy supply comes from coal-fired power plants. China burns more coal – an estimated 1.9 billion tons per year – than the US, EU and Japan combined, and builds a new coal-fired electricity plant every 7-10 days.

4. The National Energy Strategy Policy (2003) states China’s aim to quadruple GDP by 2020, while only doubling energy consumption. To meet this ambitious goal, however, China would still have to expand all areas of energy production: doubling both coal and large-scale hydropower capacity, quadrupling nuclear capacity, and increasing non-hydro renewable energy production by 100-fold.

5. China added power capacity in 2006 equivalent to the entire power grids of the United Kingdom and Thailand combined – 90% of which is coal-based. New coal plants added to the Chinese power grid in 2006 alone increased the country’s carbon dioxide emissions by 500 million tons – adding 5% of the entire world’s coal-fired CO2 output in one year.

Another fact:
In 2006, the China Daily reported that Beijing had only 11 blue sky days per month over the past 5 years, which was far short of its 22 days per month expected.


1. India is the world’s 4th largest emitter of greenhouse gases. A one-meter rise in sea level could displace millions of people in India, a country with a coastline of several thousand miles.

2. According to the Allianz/WWF Climate Scorecards 2009, India’s carbon dioxide emissions have increased by 78% since 1990. Per capita carbon dioxide emissions in India are only 2 tons compared with 25 tons for the average U.S. citizen or 11 tons for the average U.K. resident.

3. The Gangotri glacier, the source of the River Ganges, is retreating at a speed of about 30 meters a year, with warming temperatures likely to increase the rate of melting.

4. Annual coal consumption in India has more than tripled since 1980.

5. On average, floods affect about 5,000 square kilometers of land and 4.2 million people in India each year. According to research carried out at Oxford University, the total number of flood zone refugees in India alone could reach anywhere between 20 and 60 million. Sea level rises could also prompt an influx of millions of refugees from Bangladesh.

India, China reject climate pact that obstructs economic growth
The environmental cost of growth in China and India
Kuznets Curve
Global Warming and the Poor – Why India and China don’t care much about climate change
India, China to cooperate over Himalayan glaciers