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Morgan Stanley on China growth and forecast 2011 demand for basic materials

A new report dated December 5th out of Morgan Stanley has a front page overview that looks like this:

LatAm Basic Materials
China’s Growth to Moderate;
Appetite for Materials to Continue


Our field trip to China led us to believe that while the country’s economic growth will slowdown, it is unlikely that the metal-intensity of its growth will change materially in the next few years.

What’s new: We spent last week in China with a group of Latin American investors meeting companies and talking to consultants. We had the opportunity to see the contrasts of the rapidly developing nation during our field trip. On one end, the impressive build out of the last decade is still ongoing in both Shanghai and Beijing. On the other end, Zibo and Dongying (second tier cities), in Shandong province, where people’s living standards are clear evidence of China’s emerging economy status and offer potential future demand for natural resources.

Economy: Expected GDP growth of 8–9% in 2011 to decelerate from unsustainably high levels, but remain robust. Despite consumption gaining importance as the driver of GDP growth, investment will lead the economy over the next few years, with social housing offsetting most ─if not all─ of the decline in private construction.

Steel: Expect steel production growth of 5–10% in 2011 with capacity utilization of ~92%. Steel demand will continue to expand, but at a slower clip than during 2003–2007. Baosteel said that 50% of Chinese listed steel companies lost money in 3Q10, and yet Wuhan believes steel prices might come down before they rise.

Iron ore: Iron ore prices expected to decline to $120–$150/t in 2011, as Indian exports normalize. With cash cost for Chinese material ranging from $75–135/t, all iron ore producers are profitable at current ore prices.

Pulp: Chinese buyers will remain opportunistic. Local production costs ~US$600/t for hardwood; US$700/t for softwood. Softwood market is tighter than hardwood. Government is supporting local plantations in an effort to reduce imported fiber dependency.

Copper: Chinese copper demand to grow 8% in 2011. According to the 12th 5-year plan, the government plans to invest RMB400B per year on average into power grid.

Read it all by downloading from here. A good piece of macro.



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