Nomura joins commodity super cycle bears

Various investment banks have been weighing in on whether or not the end of the commodity/ steel/ metal and other super-cycles, which have been led primarily by China’s increasing demand. Credit Suisse has different teams on either side of the debate, and Citi thinks that it’s over.  Now it is Nomura’s turn.

Similar to Citi’s argument, Nomura thinks that while commodity consumption per capita-type of analysis shows that China’s metal consumption does not look very stretched, this type of analysis is understating the true usage.  Citi argues that the value in use (i.e. taking the prices of those metal into account) analysis shows that China has overtaken most of the developed world in terms of metal consumption, while Nomura points out that the amounts of various metals used per USD1 million of GDP for China are basically outliers and outrageously high:

Why we are different is more important than the fact we are different: Our analysis is focussed on metal intensity of China’s GDP, not per capita metal consumption

The point we wish to emphasize to readers is not so much that our forecasts are different, but why they are different.

We have performed a detailed analysis of metal intensity of GDP for steel, copper and aluminium in the following pages, which we believe clearly outlines our view that China’s economy is not large enough (in GDP terms) to support a continuation of the rapid growth in metal consumption seen in 2000-11.

Our conclusions are based on an analysis of China’s metal intensity of GDP rather than metal consumption per capita, and reflect a simple premise that while a country’s population size may be an important indicator of a country’s potential demand for industrial metals (per capita), the ability to meet potential demand is determined by the quantity of metal consumed in relation to the size of economic output (ie, GDP, not GDP per capita). Hence, in our view, metal intensity of GDP is a more important variable to monitor than per capita metal consumption.

The three charts below show the per capita consumption.  As you can see, China is not really using ridiculous amount of various metals on a per capita basis:

On a consumption per GDP basis, however, China is outrageously high.  In other words, for the same amount of GDP, China is already using much more steel, copper and aluminium than most other countries, as shown in the following three charts:

The reason is that, according to Nomura, the per-capita analysis ignores the composition of China’s GDP growth.  China’s investment driven growth is very metals intensive:

We see metal-intensity charts as a proxy for fixedasset investment as a proportion of total GDP, with a higher metal intensity as a component of GDP signalling that a higher proportion of GDP is being generated from metal-intensive activities such as construction and fixed-asset investment. These charts plot tonnes of metal used to generate USD1mn of GDP (USD2010) on the left-hand side against annual GDP in USD trillion (USD2010) along the bottom, with the data from 1960-2011 as actual and with the dotted line as forecast for 2012-2020. A quick glance confirms that China’s GDP is significantly more metal intensive than those of the countries with which it is being compared, but more importantly China has created significantly more GDP at very high levels of metal intensity than other countries.

Thus China is using:

Significantly more steel to generate the same USD1mn of GDP as other countries

Significantly more copper to generate the same USD1mn of GDP

Significantly more aluminium to generate the same USD1mn of GDP

While they are not expecting a hard landing in the economy:

But a soft landing in China’s economy may initially feel like a hard landing in commodities markets until expectations adjust

Our view remains consistent with that of our economists and strategists, which is essentially there will be no hard landing for China as a whole, and through time China’s economy will begin to diversify away from construction-intensive to consumptionintensive activities. But it’s important for investors to recognize that a transition in China’s growth model will impact different sectors with different speed and severity.

Miners and mining-related companies have been among the largest beneficiaries of China’s rapid growth since 2001, and if China’s growth model is in the process of changing, even in a small way, then the negative consequences of such change are likely to be felt disproportionately by those who have benefitted the most from the previous trend, especially given current production expansion plans are designed to meet continued and rapid demand growth from China

The only bullish thing on metal stocks?

Gold equities are trading at 20-year lows on a forward PER basis: You don’t need to be a “gold bug” to buy gold equities here …

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  1. Ranier Wolfcastle

    At first I thought this was just a restatement of the Pettis model of switching away from investment led growth. However from e.g. the steel chart:

    China uses 103.6 tonnes of steel per USD trillion of GDP.

    The final point on the chart is 6.3 trillion GDP

    So China uses 652.7 tonnes of steel as of the final data point of the chart

    The chart extrapolates to 83.8 tonnes of steel per USD trillion of GDP and 12.1 trillion GDP.

    That means they extrapolate to 1014 tonnes of steel usage.

    To get from 6.3 to 12.1 trillion @ 7.5% growth takes 9 years.

    They extrapolate that steel usage will grow by 5% over those 9 years. This is bullish not bearish.

    Despite those bullish demand numbers — which from the demand side would be music to the ears of iron ore producers — the high usage of steel is highlighted in bold as if it is a bad thing.

    • It all comes down to whether you see the end use of this steel consumption as sustainable or not.

      Say I’ve been drinking a bottle of scotch each day for a month. The month before was half a bottle a day, the month before that a quarter of a bottle. Based on the trend I should be drinking two bottles a day next month. This is great for distillery stocks (assuming I’m a major client), but not sustainable for me.

      • Ranier Wolfcastle

        I wasn’t offering an opinion of whether steel consumption was sustainable. I was commenting on Nomuras opinion.

        i.e. whether or not growth in steel production is sustainable is a different question to whether Nomura is bullish or bearish in their analysis.

        The headline says Nomura is a super cycle bear yet Nomura forecasts e.g. steel growth at 5% for the next 9 years.

        That is not bearish.

        Given that the Nomura prediction are much the same as the major minors, Nomura would be better described as a super cycle bull based on what is presented in this article. …but fat chance of that sort of headline.

          • I suppose I was explaining how I see Zarathustra’s reading of Nomura’s analysis. You may disagree with how he might frame everything, including the Nomura report, within a China-bear paradigm, but what I like about him is that he’s effectively doing the opposite of what nearly everyone I work with (in the financial research industry) does, i.e. frame every data-point within a China-bull paradigm. He can seem overly bearish, but I find this refreshing… at least from a risk forecasting angle.

          • Ranier Wolfcastle

            I don’t read MSM at all other than the occasional link that is posted here. I read 4-5 blogs daily and another 6-10 semi regularly. I wouldn’t characterize any of the blogs I read as bullish, rather neutral to bearish and perma-bearish.

            So I guess your frustration being surrounded by perceived excess bullishness is mirrored by the pervasive bearishness of what I read.

            As someone who owns iron ore stocks I ask myself does a forecast of 5% growth in China’s steel production make me nervous. Answer is definitely not*. Therefore I do not see how that forecast could be bearish. To me that sounds like being grumpy because the sun is shining and birds chirping.

            (* I’m talking solely of this forecast and this data)