LI & FUNG China Sourcing Quarterly

Transcription

1 LI & FUNG China Sourcing Quarterly October 2009Issue 1 IN THIS ISSUE : Part One : 1 Major Price Indicators Part Two: 2 Raw Material Prices and Exchange Rate Part Three: 13 Highlights Part One: Major Price Indicators 1. Consumer prices have continued to show negative growth Since February 2009, the growth rate of the consumer price index (CPI) 1 has remained in the negative territory, fluctuating between -0.8% yoy and -1.8% yoy. In 3Q09, the decline in CPI was down to -1.8% yoy in July, narrowed to -1.2% yoy in August, and improved further to -0.8% yoy in September. (See Exhibit 1 & 2) Exhibit 1: China s CPI growth, Oct Sep 2009 Source: National Bureau of Statistics, PRC Exhibit 2: China s CPI growth by selected commodity, Apr - Sep 2009 yoy growth (%) Apr May Jun Jul Aug Sep Clothing Household services, maintenance and renovation Recreational, educational products & services Helen Chin, Timothy Cheung Tel: (852) helenchin@lf1937.com timothycheung@lf1937.com Li & Fung Research Centre 13/F, LiFung Centre, 2 On Ping Street, Shatin, Hong Kong Tel : (852) Fax : (852) lfdc@lf1937.com Source: National Bureau of Statistics, PRC 2. The price index for industrial products has continued to fall The growth rate of producer price index (PPI) 2 has stayed negative since December 2008, reflecting weak global demand, as well as excess capacity in many manufacturing sectors in China due to export contraction. 1 The CPI, which is compiled by the National Bureau of Statistics of China, measures the prices of a basket of goods and services that a typical household purchases. 2 The PPI, which is compiled by the National Bureau of Statistics of China, measures the prices of industrial products when they are sold for the first time after production. 1

2 LI & FUNG China Sourcing Quarterly In 3Q09, PPI continued to post negative growth rates, dropping by 8.2% yoy in July, 7.9% yoy in August, and 7.0% in September. (See Exhibit 3 & 4) Exhibit 3: China s PPI growth, Oct Sep 2009 Source: National Bureau of Statistics, PRC Exhibit 4: China s PPI growth by selected commodity, Mar - Aug 2009 yoy growth (%) Mar Apr May Jun Jul Aug Textile Industry Textile, Clothing and Footwear Production Leather, Furs, Down and Related Products Timber Processing & Wood, Bamboo, Cane, Palm Fiber and Straw Products Source: National Bureau of Statistics, PRC Part Two: Raw Material Prices and Exchange Rate 1. Purchasing price index of raw material, fuel and power declined by more than 10% in 3Q09 The growth rate of purchasing price index of raw material, fuel and power 3 has been on downward trend since 3Q08 and turned negative since December 2008, in line with the falling global commodity prices in The purchasing price index for raw material, fuel and power, which is compiled by the National Bureau of Statistics of China, measures the prices of production inputs such as raw materials, fuels and power, purchased by industrial enterprises. 2

3 October 2009Issue 1 The index declined by 11.3% yoy, 11.7% yoy and 11.4% yoy in June, July and August respectively, before moderating a bit to -10.1% in September. (See Exhibit 5 & 6) Exhibit 5: China s purchasing price index of raw material, fuel and power, Oct Sep 2009 (% yoy growth) Source: National Bureau of Statistics, PRC Exhibit 6: China s purchasing price index of raw material, fuel and power by selected commodity, Jan - Sep 2009 yoy growth (%) Jan-09Feb Mar Apr May Jun Jul Aug Sep Fuel & power Non-ferrous metals Raw materials for chemical industry Timber and paper pulp Textile raw materials Source: National Bureau of Statistics, PRC (i) Purchasing price index of fuel & power Since September 2008, the growth rate of purchasing price index of fuel & power has been on downward trend. In August 2009, the index fell by 17.0% yoy, down all the way from a mere -0.6% yoy in December 2008, before moderating to -14.3% yoy in September. (See Exhibit 6) (ii) Purchasing price index of non-ferrous metals In line with the rebound in global commodity prices, the decline in the price index of non-ferrous metals moderated from the trough of -31.9% yoy in March 2009 to -17.0% yoy in September. (See Exhibit 6) 3

4 LI & FUNG China Sourcing Quarterly (iii) Purchasing price index of raw materials for chemical industry The growth rate of purchasing price index of raw materials for chemical industry has turned negative since December 2008, when it was -3.3% yoy. The growth rate of the index continued its downward trend throughout the first eight months of 2009: The price index fell by -11.1% yoy, -11.7% yoy and -11.4% yoy respectively in June, July and August. (See Exhibit 6) (iv) Purchasing price index of timber and paper pulp The growth rate of purchasing price index of timber and paper pulp has continued to drop since November The price index fell by 5.7% yoy in June, further declined by 7.3% yoy and 7.7% yoy respectively in July and August. (See Exhibit 6) (v) Purchasing price of textile raw materials The purchasing price index of textile raw materials recorded yoy growth rates of -1.4%, -1.2% and -1.8% in June, July and August 2009 respectively, mainly due to the weak foreign demand on garment. (See Exhibit 6) 2. China s cotton price indices have continued the upward trend China s cotton price indices 4 have rebounded from the trough and trended upward since late November 2008, as the Chinese government continued to buy cotton for its state reserve and as the Chinese economy gradually bottomed out. In late August and early September 2009, the indices moderated slightly, with the government releasing its cotton reserve to increase supply in the market. However, since mid-september, the indices of cotton have trended upward again. (See Exhibit 7) Exhibit 7: China s cotton price indices, Oct Oct 2009 Source: China Cotton Association 4 The indices, which are compiled by the China Cotton Association, track cotton prices quoted from two hundred textile enterprises. 4

5 October 2009Issue 1 3. Nanjing Wool Market Composite Index has bottomed out The Nanjing Wool Market Composite Index 5, one of the major wool price indices in China, has bottomed out: After falling in 1Q09 against the backdrop of economic downturn, the index rebounded strongly in late March, April and May, in line with the recovery of the commodity market and stronger domestic demand. The index then softened a bit in June and July, before picking up again in August, September and October, boosted by stronger foreign demand and the appreciation of currencies of Australia and New Zealand, major wool exporters, against the RMB. (See Exhibit 8) Exhibit 8: Nanjing Wool Market Composite Index, Oct Oct 2009 Source: The Nanjing Wool Market 4. Price indices of polyester have picked up again since mid-october Since bottoming out in January, price indices of polyester 6 were generally on upward trend, though with some ups and downs, in the first seven months of 2009, in line with the price movement of crude oil, the major raw material of polyester. After peaking in early August, the price indices declined in the rest of the month and September, mainly caused by the weak demand from garment manufacturers. However, since mid-october, the indices have picked up again. (See Exhibit 9) The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 5

6 LI & FUNG China Sourcing Quarterly Exhibit 9: Price indices of polyester, Oct Oct 2009 Source: China Chemical & Fiber Economic Information Network 5. Price index of acrylic staple fiber has stabilized since June After remaining at very low levels for more than three months, the price index of acrylic staple fiber 7 picked up in April and May, as the price of acrylonitrile, the major raw material of acrylic staple fiber, rebounded strongly and the de-stocking process of the material had largely run its course. Since June, the index has stayed stable and fluctuated within the range of to 17800, given that the price of acrylonitrile has also stabilized due to the increased market supply. (See Exhibit 10) Exhibit 10: Price indices of acrylic, Oct Oct 2009 Source: China Chemical & Fiber Economic Information Network 7 The index is complied by the China Chemical & Fiber Economic Information Network (CCFEI). 6

7 October 2009Issue 1 6. Price indices of nylon have moderated a bit since mid-september Price indices of nylon 8 bottomed out in 1Q09 and were in increasing trend from May to July, due to the rise in raw material price, stronger demand for but limited supply of Nylon. After peaking in late August, price indices plateaued till late September, and have fallen a bit since then, largely reflecting the weakening demand for nylon. (See Exhibit 11) Exhibit 11: Price indices of nylon, Oct Oct 2009 Source: China Chemical & Fiber Economic Information Network 7. Price index of viscose staple fiber has stabilized since late August Price index of viscose staple fiber 9 bottomed out in early February and was generally on upward trend since then, supported by the continual rise in raw material prices and increasing downstream demand. The index has stabilized at around since late August, with prices of wood pulp, the major raw material of viscose, remaining firm. (See Exhibit 12) Exhibit 12: Price indices of viscose, Oct Oct 2009 Source: China Chemical & Fiber Economic Information Network 8 The indices are complied by the China Chemical & Fiber Economic Information Network (CCFEI). 9 The index is complied by the China Chemical & Fiber Economic Information Network (CCFEI). 7

8 LI & FUNG China Sourcing Quarterly 8. Price index of ABS resin has continued to show positive mom growth The price index of ABS resin 10 posted relatively strong mom growth rates in 1Q09 and April, before falling by 3.1% mom in May, in line with the price movement of Styrene, a major raw material of ABS resin. Since June, the price index has continued to register positive mom growth rates, rising by 4.4% mom, 1.7% mom and 4.6% mom respectively in June, July and August. (See Exhibit 13) It is also noteworthy that the price index so far this year has been significantly lower than in 2008, as shown by the negative yoy growth rates in all months in Exhibit 13: Price index of ABS resin, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug ABS resin (mom growth %) ABS resin (yoy growth %) Price index of PP showed slow mom growth in the past few months The price index of polypropylene (PP) 11 has shown only slow mom growth since May this year, due to sluggish demand on PP. The August mom growth rate picked up a bit to 2.9%. Note that the price index once recorded a spike in mom growth in April, boosted by the rise in prices of upstream products. (See Exhibit 14) Exhibit 14: Price index of PP, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug PP (mom growth %) PP (yoy growth %) Price index of natural rubber has continued to show positive mom growth In August, the price index of natural rubber 12 grew strongly by 12.7% mom, up from 0.7% mom in July, as the supply of rubber fell. Harvest activities in Indonesia, a top rubber producing country, slowed down during Ramadan, the Muslim holy month, which began on 22 August. Note that the index has shown positive mom growth since April 2009, boosted by the recovery of the auto industry in China, an important downstream industry of rubber. (See Exhibit 15) 10 The index is compiled by the China Federation of Logistics & Purchasing (CFLP), which is the first logistics and purchasing industry association approved by the State Council. One of the CFLP s missions is to push forward the the circulation of factors of production in China. 11 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 12 The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 8

9 October 2009Issue 1 Exhibit 15: Price index of natural rubber, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Natural rubber (mom growth %) Natural rubber (yoy growth %) Price index of non-ferrous metals has continued to show moderating yoy decline With the rebound in global commodity prices, the decline in price index of non-ferrous metals 13 has improved continuously from -45.9% yoy in February 2009 to -14.9% yoy in August. In fact, the yoy growth rates of price indices of several types of non-ferrous metals have been on upward trend since 1Q (See Exhibit 16-20) For example, the growth rate of the price index of copper moderated from -56.5% yoy in February to -20.0% yoy in August; that of the aluminum price index rebounded from -37.7% yoy in February to -16.8% yoy in August; and that of the zinc price index improved from % yoy in February to 3.2% yoy in August. Exhibit 16: Price index of non-ferrous metals, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Non-ferrous metals (mom growth %) Non-ferrous metals (yoy growth %) Exhibit 17: Price index of copper, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Copper (mom growth %) Copper (yoy growth %) Exhibit 18: Price index of aluminum, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Aluminum (mom growth %) Aluminum (yoy growth %) The index is compiled by the China Federation of Logistics & Purchasing (CFLP). 14 The indices are compiled by the China Federation of Logistics & Purchasing (CFLP). 9

10 LI & FUNG China Sourcing Quarterly Exhibit 19: Price index of lead, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Lead (mom growth %) Lead (yoy growth %) Exhibit 20: Price index of zinc, Feb - Aug 2009 Feb Mar Apr May Jun Jul Aug Zinc (mom growth %) Zinc (yoy growth %) China s crude prices rose again in October After declining a bit in September, crude prices have been increasing. For example, Daqing 15 crude price went up to US$74.55 per barrel on 20 October, the highest since October After bottoming out in late December 2008, prices of domestic crude were on upward trend, though with some fluctuations, in the first ten months of this year. (See Exhibit 21) Exhibit 21: China s crude prices, Oct Oct 2009 Source: ifeng.com 15 Daqing Field ( ) is the largest oil field in China. 10

11 October 2009Issue Price index of refined oil products showed negative mom growth in August The price index of refined oil products posted negative growth rate of -2.3% mom in August, reflecting government action to cut the prices of gasoline and diesel on 29 July. The price index recorded positive mom growth rates in April, May, June and July, as the government raised fuel prices on 25 March, 1 June and 30 June. (See Exhibit 22) In China, retail prices of refined oil products, namely gasoline and diesel, are still under the government control. The government would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. Detailed discussion can be found in the Highlights section. Exhibit 22: China s price indices of refined oil products, Feb - Aug

12 LI & FUNG China Sourcing Quarterly 14. The RMB/USD exchange rate has been stable so far this year; but the RMB depreciated against its trading partners in real terms in the first nine months of 2009 In 1-3Q09, the nominal RMB/US exchange rate was stable, staying within the range of By contrast, the RMB depreciated against the Euro in the past few months: the nominal RMB/Euro exchange rate rebounded from the recent low of 8.53 on 4 March to on 21 October. (See Exhibit 23) Against its trading partners, the RMB depreciated in real terms in the first nine months of 2009, as indicated by the real effective exchange rate (REER) compiled by the Bank for International Settlements. 16 The RMB REER dropped from in December 2008 to in September 2009, due largely to the rebound of currencies of a number of countries against the US dollar. Overall, the RMB REER depreciated by 3.9% in Jan-Sep (See Exhibit 24) Although the prevailing international public opinion is in favor of RMB appreciation as a way to tackle the issue of global imbalances, we hold the view that the nominal RMB/USD exchange rate will remain stable in 4Q09. RMB appreciation has two major drawbacks: First, it would weaken the competitiveness of Chinese exports, which has continued to record negative yoy growth rates in yoy terms since November Second, a significant RMB appreciation would lead to a big loss in value of China s foreign exchange reserve in RMB. 17 Afterall, at a time when many other currencies are fluctuating drastically, the relative stability of the RMB would make it a more attractive currency in the international market, and would thus facilitate the internationalization process of the RMB. Exhibit 23: RMB/USD and RMB/Euro, Jan Oct 2009 Source: State Administration of Foreign Exchange 16 The Bank for International Settlements (BIS) calculates effective exchange rate (EER) indices for a total of 58 economies (including individual euro area countries and, separately, the euro area as an entity). Nominal EERs are calculated as geometric weighted averages of bilateral exchange rates. Real EERs are the same weighted averages of bilateral exchange rates adjusted by relative consumer prices. The weighting pattern is time-varying, and the most recent weights are based on trade in According to local media, about 70% of China s foreign exchange reserves are held in dollar-denominated assets. 12

13 October 2009Issue 1 Exhibit 24: RMB REER, Jan Sep 2009 Source: Bank for International Settlements Part Three: Highlights 1. The government cut fuel prices by 3% on 30 September, in response to the drop in global crude prices in September On 30 September 2009, the government cut the gasoline price and the diesel price by 3%, or 190 yuan per tonne. The purpose of the price adjustments was to allow domestic fuel prices to reflect the drop in international crude-oil prices since the previous upward adjustment in fuel prices in early September This was already the seventh time in 2009 the government adjusted fuel prices. So far this year, fuel prices have been cut for three times and raised for four times. Indeed, since the introduction of new refined oil pricing mechanism on 1 January 2009, fuel prices have been adjusted more frequently than before as the prices would be determined by the following factors: international crude-oil prices, domestic refining costs, taxes and reasonable profit for refiners. The government official would consider adjusting fuel prices when the 22-day moving average of a basket of global crude prices has changed by more than 4%. Therefore, the pass-through effects of global oil prices on local prices have been stronger than before. Looking forward, as global crude prices have risen again since October (See Part Two above), the market generally expects that the government will adjust fuel prices upward in the near future. 13

14 LI & FUNG China Sourcing Quarterly 2. Guangdong government issued new salary guidelines On 17 July 2009, the Guangdong government issued new salary guidelines 18 that recommend a smaller increase in salary this year, in view of the weak labor demand and slow economic growth in the province. According to the salary guidelines for 2009, the average salary rise is set at 7% in 2009, down from 10% in 2008, whilst the upper limit of pay rise is 12% in 2009, compared to 15% in The guidelines also suggest that enterprises in difficulties can consider freezing or even reducing wages of their employees. Although the guidelines are not mandatory for employers to follow, they are regarded as an important reference. Nevertheless, with the recent recovery of the Chinese economy, the demand for workers have started to rise again there are already reports on the resurgence of labour shortages in the Pearl River Delta recently. We are likely to see upward pressure on wages soon. 3. China s export has shown signs of recovery Since the outbreak of the financial tsunami, the export sector in China has faced serious challenges, mainly due to the worsening global economy. China s export growth rate decelerated from 4.3% yoy in 4Q08 to -21.3% yoy in Jan-Sep Nevertheless, it is noteworthy that China s export has shown signs of recovery. Export data recorded in September was better than expected. The yoy growth rates of monthly exports improved to -15.2% yoy in September, after fluctuating between -21.4% yoy and -26.4% yoy from April to August. The recovery is more obvious if we compare seasonally adjusted figures across months: the Chinese export continued to show positive mom growth in the past few months, rising by 0.2% mom, 4.5% mom, 5.2% mom, 3.4% mom and 6.3% mom respectively in May, June, July, August and September. (See Exhibit 25-27) The prospects for the world economy have been improving. In the latest report published by the International Monetary Fund (IMF) on 1 October, the IMF suggested that the global recovery has been under way. The institution predicted that the world economy in 2010 will grow by 3.1% yoy, up 0.6 ppt. from its previous forecast made in July 2009, and its projection of the 2009 growth was also revised upward to -1.1% from the earlier projection of -1.4% made in July. 19 With the gradual recovery of the global economy, global retailers are expected to step up their sourcing activities in China. In fact, the new export orders sub-index of the manufacturing PMI 20 has stayed above the critical level of 50% for five consecutive months, indicating that the Chinese manufacturing sector has continued to record expansion of new export orders. We believe that China s export situation is set to improve further in the near future. Nevertheless, China s trade disputes with its major trading partners have been increasing recently, arousing concerns about rising tide of protectionism. In September, for example, the US government announced to impose punitive tariffs on Chinese tires for automobile and light-truck tires, effective from 26 September IMF, World Economic Outlook, 1 October The CFLP China Manufacturing Purchasing Managers Index (PMI) provides an early indication each month of economic activities in the Chinese manufacturing sector. It is compiled by China Federation of Logistics & Purchasing (CFLP) and China Logistics Information Centre (CLIC), based on data collected by the National Bureau of Statistics of China. Li & Fung Research Centre is responsible for drafting and disseminating the English PMI report. A PMI reading above 50% indicates an overall expansion in the manufacturing sector; below 50%, an overall contraction Imposes-Safeguard-Duties-on-Tyre-Importsfrom-China Safeguard-Petitions-on-Other-Products-Likely.htm 14

15 October 2009Issue 1 Soon afterwards, the Chinese government announced to launch anti-dumping investigations into auto and chicken products imported from the US. And on 25 September, the European Union announced to impose anti-dumping tariffs on seamless steel pipes imported from China, and on aluminium foil imported from three countries, which includes China. 22 The US government also announced on 7 October to initiate an anti-dumping investigation into the Chinese seamless steel pipes. 23 Then, on 12 October, the Chinese government announced to impose antidumping tariffs on nylon 6/6 resin importing from several countries, including the US, the UK and Taiwan. As most China s key trading partners will still be under huge political pressures to save jobs through protecting domestic industries from import competition, despite the seemingly recovering global eocnomy, it remains worrisome that they will continue to adopt protectionist measures such as tariffs, subsidies, safeguards, anti-surge and anti-dumping mechanisms, emission-related tariffs, buy local provision, bans on alleged safety ground, etc. in the near future. Exhibit 25: China s quarterly foreign trade data, 4Q08-3Q09 USD billion (yoy growth) Export Import Trade Balance FY08 1,428.5 (17.2%) 1,133.1 (18.5%) (12.5%) 4Q (4.3%) (-8.8%) (49.8%) 1Q (-19.7%) (-31.0%) 62.3 (50.6%) 2Q (-23.5%) (-20.2%) 34.7 (-40.2%) 3Q (-20.3%) (-12.0%) 39.2 (-52.9%) Source: China Customs Exhibit 26: China s monthly foreign trade data, Oct 08 - Sep 2009 USD billion (yoy growth) Export Import Trade Balance Oct (19.2%) 93.1 (15.6%) 35.2 (29.6%) Nov ( -2.2%) 74.9 (-17.9%) 40.1 (51.7%) Dec (-2.8%) 72.2 (-21.3%) 39.0 (71.9%) Jan (-17.5%) 51.4 (-43.1%) 39.0(102.0%) Feb 64.9 (-25.7%) 60.0 (-24.2%) 4.8 (-43.3%) Mar 90.2 (-17.2%) 71.7 (-25.2%) 18.5 (41.2%) Apr 91.9 (-22.6%) 78.8 (-23.0%) 13.1 (-21.2%) May 88.8 (-26.4%) 75.4 (-25.2%) 13.4 (-33.7%) Jun 95.4 (-21.4%) 87.2 (-13.2%) 8.3 (-61.3%) Jul (-23.0%) 94.8 (-14.9%) 10.6 (-58.0%) Aug (-23.4%) 88.0 (-17.0%) 15.7 (-45.3%) Sep (-15.2%) (-3.5%) 12.7 (-56.0%) Source: China Customs

16 LI & FUNG China Sourcing Quarterly Exhibit 27: Growth rates of export and import, Oct Sep 2009 Source: China Customs Li & Fung Research Centre Member of the Li & Fung Group Founded in Guangzhou in 1906, the Li & Fung Group is a multinational group of companies headquartered in Hong Kong, operating in three distinct core businesses - export sourcing, integrated distribution and retailing. The Li & Fung Group has a total staff of over 35,500 across more than 40 countries worldwide, with an annual turnover exceeding US$16.7 billion in One of its core competency is Supply Chain Management (SCM). Li & Fung Research Centre ( the Centre ) researches and publishes reports on wide-ranging topics: Chinese economy, consumer market, retail sector, trade-related issues, and consumer goods industries, etc. Apart from providing internal consultancy for the Group and its clients, the Centre also participates in formulating business strategies in the Mainland market. The Centre has been actively promoting the application of SCM. In 2003, the Centre published the book The Orchestrator of Global Supply Chain Management, which is regarded as a very useful reference among businessmen and academics in the Chinese mainland, Taiwan and Hong Kong. Copyright 2009 Li & Fung Research Centre. All rights reserved. Though Li & Fung Research Centre endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Li & Fung Research Centre and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document. Reproduction or redistribution of this material without Li & Fung Research Centre s prior written consent is prohibited. 16