Supply and Demand Issues Fuel China's Automobile, Steel, and
Coal Industries
Supply and Demand Issues Fuel China's Automobile, Steel, and
Coal Industries
Suppliers and Participants Mittal Steel, PUDA Coal, SORL Auto
Parts, and China Automotive Systems Benefit From China's Growing
Industrial Economy
www.China-AsiaStocks.com
As China's growing economy and expanding infrastructure impacts
demand and supply in major industry sectors including
automotive, steel, and coal, companies that are positioned in
China as suppliers will benefit. Mergers and acquisitions,
rising prices and overall strength in construction and
infrastructure all indicate strong growth signals within the
sectors.
The automotive industry is anticipated to be driven by Asian
demand and Asian consumers for the next five years. In addition,
China's surging construction levels are in turn pushing the
demand for commercial vehicles higher. China' entry into US
automotive markets and expected increased exports, changes the
face of the global automotive industry. Companies that will
survive and benefit from the global changes will have
incorporated strategies to position themselves in both China and
the US.
SORL Auto Parts (OTCBB: SAUP), China's leading manufacturer and
distributor of automotive air brake valves for the commercial
vehicle market identifies North America as a key focus for
increasing export sales, taking advantage of the construction
industry's growing demands.
With China continuing to expand its infrastructure, demand for
coal is on the rise globally and within China. Recent news that
China's largest electricity producer, China Huaneng Group,
signed a letter of intent (LOI) with Shanxi Coking Coal Group
(one of China's largest coking companies) to jointly develop a
coal mine is a positive sign for smaller companies like PUDA
Coal (OTCBB: PUDC), a supplier of premium grade coking coal to
the steel making industry. Supply for coking coal is anticipated
to increase by 5.4 million tons this year.
With coking coal utilized to smelt iron and steel, it is
directly impacted by the steel industry. Steel prices and stocks
are up based on discussions of M&A and consolidation. With steel
prices increasing more than 150 percent since 2003 based on US
and the increased demand from China and India, it sets the stage
for Mittal Steel, one of the world's biggest steel makers,
acquiring a 37.17 percent stake of a subsidiary of Hunan Valin
Iron and Steel Group of China. Mittal, U.S. Steel and Nucor
control 55 percent of the U.S. steel market.
Auto Industry Transformation
China's automotive industry has experienced rapid growth since
the country opened itself up to the rest of the world and
adopted economic reforms. In addition, the 2008 Olympics in
Beijing and the 2010 World Expo in Shanghai are two key events
that are expected to stimulate significant growth in the
transportation logistics industries. Meanwhile, massive
construction projects all over China are spurring the growth in
the heavy duty vehicle and commercial vehicle market.
SORL Auto Parts is meeting the increasing demand as a
manufacturer and distributor of automotive air brake valves and
hydraulic brake valves mainly for the commercial vehicles
market. For the nine months ended September 30, 2005, the
Company realized an increase of 38 percent generating sales of
$45.8 million, compared to $33.1 million for the nine months
ended September 30, 2004. David He, SORL's Senior Manager of
Investor Relations and International Business Strategy and
Planning states, "The trend of urbanization gives China's
construction sector a historic opportunity. The booming
construction sector also stimulates the development of
construction materials and construction machinery, resulting in
tremendous increase in demand for transportation, particularly
the use of heavy duty vehicles. It is expected that heavy duty
vehicles will maintain a significant market in China. In 2005,
China's total heavy duty truck output was approximately 250,000
units. Industry experts estimate that the market will sustain an
annual growth rate ranging from 10% to 15% until the national
output reaches 600,000 units per year. It is projected that
total annual output of heavy duty vehicles in China will reach
450,000 to 500,000 units by 2008."
According to Mr. He, there are four major driving factors for
this industry: "First of all, the Chinese economic growth and
the progress of urbanization will ultimately drive the demand
for automobiles. Also, it is the government's industrial policy
to support the development of the auto industry as one of the
nation's pillar industries. Thirdly, rapid expansion of the
domestic auto market in recent years, leading to the
corresponding growth of auto parts market, for both OEM and
aftermarket. Last but not least, the relatively low cost of
Chinese auto parts has driven increasing volume of auto parts
exports; the lower cost of qualified labor has attracted more
and more foreign investment, shifting manufacturing from their
home countries - each of these factors promotes the development
of the Chinese auto parts industry."
China Automotive is one of the major suppliers of power steering
systems and components to China's automotive industry. Jie Li,
Investor Relations Officer for China Automotive states,
"Infrastructure build up reflected in highway, transportation
and bridge construction will continue to increase. The national
highway system is aiming at 1 million miles. CAGR of the Chinese
auto market will remain at 15% for the next 5 to 10 years.
Subsequently, the auto parts market will look healthy as well.
With the trend of global purchasing of auto parts, the Chinese
auto parts market will enjoy 20% annual growth. Also, joint
ventures between Chinese auto makers and foreign car makers will
increase domestic auto parts purchases. Another important issue
that will benefit the domestic auto parts market is that the
Chinese government now requires auto makers to purchase 40% of
their parts from domestic firms in the first year, and 60% in
the second year."
Building Demand from Construction
The Chinese steel industry has continued to experience double
digit annual rates of growth as it has worked to keep pace with
the construction boom. China has grown to the largest steel
market in the world from a relative unknown in short order. As
reported in Global Insight, Steel at a Crossroads: China's role
in shaping new global market, "China's steel consumption is up
110% over a six-year period and is still rising, producing over
26% of the world's supply of steel, while consuming 27%."On the
other hand, the growth of the steel industry is also restricted
by the limited supply of many non-renewable raw materials, such
as coal, coke and iron ore.
As vital suppliers to the steel industry, both thermal coal and
coking coal producers are facing very high demand. According to
the China Coal Industry Association (CCIA), with demand rising,
the price of thermal coal used for power production had risen 50
percent to more than $60 a tonne since the beginning of this
year; term prices for coking coal, the material used in steel
production, are set to almost double next year, to $100 a tonne
or above from under $60 this year.
PUDA Coal, a Chinese coking coal producer, is benefiting
significantly from the high profitability provided by this
trend. According to Puda CEO Zhao Ming, "The factor that drives
the demand for coking coal is the mass construction of
infrastructure, including but not limited to real estate
development, extended urbanization process, western region
development and the 2008 Beijing Olympic Games. These projects
require the use of large amounts of steel, and coking coal is
essential in making coke, which is largely used in the steel
making process. Puda's future focus is to sell directly to steel
mills with their own coking facilities (or so-called integrated
coking-steel making mills). "
Mark Lidiard, Vice President of Investor Relations and
Communications for BHP Billiton, the biggest coking coal
producer in the world states, "Metallurgical coal is used in
steel making industries, and incremental demand for
metallurgical coal is primarily being driven by the growth in
the Chinese steel market. On the other hand, steaming or thermal
coal is used in power industry, and they tend to be driven more
by global power demand. Although again incremental growth in
power in China is causing some pressure on the thermal coal
industry, which again is creating good demand for thermal coal
products around the world. As well very high current oil and gas
prices are driving the demand for coal."
Mittal Steel, one of the world's biggest steel makers, signed an
agreement in 2005 to acquire a 37.17 percent stake of a
subsidiary of Hunan Valin Iron and Steel Group of China.
According to the Company, "This transaction is a key milestone
for Mittal Steel's business in China and is an integral part of
its global strategy. China is the world's largest consumer of
steel products and demand is expected to continue to grow
strongly. Mittal Steel's participation in the expected growth of
the Chinese steel industry will be further enhanced through its
investment in the Company and its partnership with Valin Group."
Lakshmi Mittal, Chairman and CEO of Mittal Steel, had been
quoted as stating, "We are confident that demand for steel in
China will remain strong and this acquisition is very much
intended as a first step towards a more significant production
presence in this country. China is experiencing a period of
rapid economic growth and we are excited by the prospect of
being a participant in this."
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Investors and industry following the growth in China should look
at trends including pricing increases, import and export growth
and restrictions, as well as global demand influences, to find
new opportunities. Steel demands are on the rise globally as
infrastructure in China and India continues to grow, creating a
robust steel market and an automotive industry that is going
through dramatic changes as the east and west converges.
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