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Contextualising China’s cement splurge

From Goldman latest Top of Mind on Chinese property:

Various commentators have pointed to China’s cement industry as one indicator of a property bubble, noting that China has produced and used more cement in the last few years than the United States did over the entire 20th century. Data from US and Chinese government sources compiled by the historian Vaclav Smil – and publicized by the blog of Bill Gates – show that China consumed 6.6 billion tons of cement in 2011-2013, vs. 4.5 billion tons consumed by the United States from 1901-2000.

China’s cement market has clearly undergone a very rapid expansion, but the statistic above is a good example of why it is important to understand the features specific to China’ housing market before drawing conclusions:

  • China’s population in 2012 was 15 times that of the United States in the early 20th century and 9 times that of the United States in 1950.

  • More important, China has been urbanizing at an unprecedented pace – not only when compared to the United States, but in a global historical context. Around 20-30 million Chinese relocate to urban areas each year, roughly equivalent to one-tenth of the United States’ population from the late 1960s up until the turn of the 21st century.

  • Unlike US homes, which typically use cement only for the foundation, China’s buildings (and housing in particular) are mainly made of concrete, requiring cement as an input.

  • Another large source of cement demand – approximately 40% – comes from infrastructure build-out including railroad construction. In April, China announced that it would complete 4,100 miles of new rail lines this year alone.

  • An estimated 25-30% of China’s cement capacity is low-grade cement not used in other countries (P.C. 32.5 grade). Short- sighted urban planning has led to widespread use of this cement despite its major drawbacks as an energy intensive building material that produces lower-quality buildings. Since cement is not recyclable, this has led to continued reconstruction and propped up overall demand. China announced in 2013 that it would gradually phase out the low-grade cement. Taking that capacity out of the market would lower the country’s cement consumption by 700-800 million tons per year, a level GS analysts consider more reasonable. 

(David)
Source: Goldman Sachs Research
(Cardiff)

Source: Goldman Sachs Research

(Cardiff)

Interesting catch from CreditSights: credit spreads on euro investment grade debt have been tightening even as spreads on junk bonds have widened.

One explanation for these moves is that investors in European bonds are shifting away from riskier bonds as the likelihood of another recession outweighs the attractiveness of higher yields.

(Matt)

BMO notes that RMB deposits held in Korea have soared from basically zero to a little more than $20 billion over the past year:

One possible explanation for this phenomenon is that Korean corporations that earn RMB from trading with China can earn about 1 percentage point more on their cash if it is kept in yuan than if it is converted into won.

Whatever the reason, the growth in RMB deposits means that it is now the second most important source of foreign currency deposits in the Korean banking system (after US dollars), although it should be noted that these fx deposits are tiny relative to the overall banking system.

Yonhap has more.

(Matt)

Thanks to improved inventory management, US industrial production has become a lot less volatile over the years. Via Credit Suisse:

(Matt)

Oct 9

Low rates aren’t good for all stocks. Companies with big (and underfunded) defined benefit pension obligations underperform their sector when interest rates fall. Via Goldman:

Pension funds are net short duration as their liabilities often have a longer duration than their assets. As a result, their solvency, which is the value of their assets relative to their liabilities, tends to decline with bond yields and they can become underfunded…While there are other factors (e.g. inflation and mortality assumptions) that affect the present value of pension liabilities, we find bond yields are by far the most important.

[…]

Regulators can force cash contributions to improve the solvency of a pension fund, which might put dividends or capex plans at risk. With falling bond yields YTD, European companies with large pension liabilities have to book increases in pension deficits directly against shareholders’ equity at the end of the fiscal year 2014

(Matt)

Oct 9

So much for the Phillips curve. According to a state-level analysis from economists at Standard Chartered, there is barely any relationship between wage growth and unemployment:

(Matt)

(Via GS economists)

(Via GS economists)

For those who still remember it, a little perspective on Piketty’s (r-g) from BernsteinResearch:

Net interest margins (a decent proxy for r) are positively correlated to growth rates and negatively correlated to the stock of wealth. Concerns about slowing growth leading to rising concentration of wealth (r-g getting bigger) may be overdone. 

(Matt)

Chart from Credit Suisse showing the movement in six polls on the Scottish referendum. 
(Cardiff)

Chart from Credit Suisse showing the movement in six polls on the Scottish referendum.

(Cardiff)

What bond bubble?

From Deutsche’s latest long-term asset return study showing where current nominal and real yields are relative to each country’s long- term history (last 100ys) in percentile terms: 

On both measures, nominal yields have rarely been lower than current levels for the majority of countries, particularly in Europe. This is a fundamental starting point for the case that government bonds are in bubble territory. However real yields are not at such extreme levels. Using the full history, most DM countries are in the 60-80% range and have therefore been lower 20-40% of the time. So they are low but not extremely low unlike nominal yields. Japan sees one of the lowest real yield readings relative to its own history in this sample partly due to the rise of 'Abenomics’, but with some of this due to the recent inflation spike after the April 2014 sales tax rise. If we go back around 18 months, this number drops from 79% to 59%. On the other side many countries in Europe actually have real yields that are closer to their median relative to history. Italy (63%) and Spain (61%), certainly stand-out, especially as both are at 100% in terms of nominal yield lows. Indeed if we only look at data over the last 100 years Spain (40%) sees real yields slightly higher than the long-term median and Italy (53%) is close to median. France (62%) is also much closer to its median over this period. 

And going back a little further in some cases:

(David)

Goldman Sachs economists round up the many estimates of cyclical vs structural labour market slack in the US.
(Cardiff)

Goldman Sachs economists round up the many estimates of cyclical vs structural labour market slack in the US.

(Cardiff)

Sep 8

The impact of the crisis on US construction spending in one chart:

Via CreditSights.

(Matt)

Sep 5

People have rightly been focusing on the comeback in US auto spending, but we were interested in this chart from CreditSights on the impressive recovery in the UK:

Their take:

Total new passenger cars in the UK market grew by 9.4% YoY to 72,163 unit sales this month — a 30th consecutive month of growth that highlights the strength in the UK autos market relative to the choppiness seen in other major European automotive markets. Private registrations were up 10.3% and fleet sales were up 10.0%, while corporate sales (2.3% of the market) fell by 14.0%. Attractive financing deals for consumers including Personal Contract Purchase (PCP) offers are helping to support growth against a backdrop of a relatively stable economic outlook. On a LTM basis, the UK market is now 0.1% above levels reached prior to the crisis in December 2007.

(Matt)

Sep 4

The robotics megatrend

The size of this coming wave of robotics is staggering: spending on robots worldwide is expected to jump from just over $15 billion in 2010 to about $67 billion by 2025. (See Exhibit 1.) Driving this growth is a convergence of falling prices and performance improvements. The cost of high-quality robots and components is dropping rapidly, while CPUs are getting faster, and application programming is getting easier. As robots become cheaper, smaller, and more energy efficient, they gain flexibility and finesse, increasing the breadth of potential applications. 

Initially, robots were used mainly for dirty, dull, repetitive, or dangerous tasks that did not require high precision, such as painting car doors or spot welding. Today’s robots, by contrast, are moving into a new range of precision applications far beyond the manufacturing realm. For instance, they’re enabling food processors to make products untouched by human hands. At Sweden-based Charkman Group, robots slice and pack high volumes of salami, ham, turkey, rolled pork, and other cooked meats. At the heart of the line is an intelligent portion-loading robot that can handle 150 picks per minute across multiple sizes and types of meat.

Via BCG Perspectives.

(Cardiff)