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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.
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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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