Take a bow Tom Miller.
If you haven’t heard the name, don’t be surprised. Mr Miller isn’t a hotshot fund manager or finance guru. He’s a journalist and author who wrote a relatively recent book called China’s Urban Billion.
It’s probably never going to rival Stephen King or JK Rowling for sales, but so far his reporting and analysis on China in that book is proving accurate.
For example, Miller doesn’t give much credence to the notion that the Chinese property market is an unstable Ponzi scheme forever dangling on the edge of collapse. That’s a contentious view now, but a gutsy call when you consider he wrote the book around the time the fear was arguably at its greatest in the market.
That’s not to say there aren’t bad debts out there in the Chinese system, but the rumoured big collapse hasn’t happened.
So far he’s been right.
But it’s another insight of his that popped up in the news this week that deserves a mention and could prove profitable for investors…
Who Talks About This Industry?
In case you missed it, the Australian reported this week that the Chinese steel industry is returning to profitability thanks to unexpectedly robust demand. It’s keeping the iron ore price anywhere between $10-$50 above expectations (depending on whose analysis you use).
Iron ore miners are skimming off a lot a cream while it’s up there and the Aussie dollar retreats back toward US90c.
Don’t forget how bearish the calls on iron ore have been. The bears may be proven right in 2014, but we’re sure even they’d admit the slowdown is taking longer than they thought it would. That’s why iron ore stocks have rerated lately. Mr Market was expecting a lower price by now, and hence lower revenues for the miners.
What’s happening?
On the supply side there’s a suggestion that Chinese iron ore mines are struggling with poor grades and rising costs. China is the biggest producer of iron ore in the world.
Bad news for them is obviously good news for Aussie suppliers.
What’s driving the demand? According to the Australian, ‘Australia’s iron ore price bonanza looks set to continue as Chinese steel output beats expectations and even the Asian powerhouse’s biggest steelmaker, Baosteel, concedes a short term drop is unlikely…steel production is being bolstered by increased car, railway and household goods manufacturing.‘
The one that jumps out of that for us is the railways. We don’t know about you but there’s not many people we hear who talk about Chinese railways. But it’s big news in China.
Tom Miller is one who does talk about this industry. He pointed out in China’s Urban Billion that China essentially has no choice but to invest in mass transit systems that can connect its major cities and bind together massive urban areas. China needs to move a lot of people as efficiently as it can.
Miller says China already has 18 mass transit systems in action, with a further 18 under construction and 23 at the planning stage.
The New York Times reported back in September that the rail network is making Chinese workers more productive, according to a study by the World Bank.
‘China’s high-speed rail system has emerged as an unexpected success story. Economists and transportation experts cite it as one reason for China’s continued economic growth when other emerging economies are faltering.‘
You can also throw in the added benefits of time saving for travellers, reduced noise, fuel savings and less air pollution. The NYT:
‘China’s new prime minister, Li Keqiang, publicly endorsed further expansion of the 5,900-mile high-speed rail network this summer. He said the country would invest $100 billion a year in its train system for years to come, mainly on high-speed rail.‘
You Should Be Watching This
This is part of a broader trend that you should be watching an investor. How can China grow its economy and cut its pollution? That’s the dilemma. But as long as the Chinese government is prepared to throw billions at it, companies will try to find solutions.
Less air pollution is exactly why the central government of China is prepared to throw billions at this problem. Watching the construction of the Chinese railway system is one way to play this idea.
Another is to watch the car and fuel industries. Caijing.com reported this week that China will begin enforcing stricter standards on its fuel refineries from the beginning of next year to contain vehicle emissions. Roughly 30% of pollution in China can be attributed to motor vehicles.
Plays on this theme don’t mean you have to invest in China, of course. China is a high risk market with insecure property rights and limited rule of law.
But there are plenty of firms that trade here in Australia or the in the US that have operations or business with China or are correlated to what’s happening over there in some way, with less risk.
Iron ore miners are the obvious example, but so are certain Japanese export stocks, US tech companies or other resource firms.
This is one reason Kris Sayce over at Australian Small Cap Investigator is jumping up and down about a recent innovation in the car industry that could reduce the weight of vehicles and cut down their emissions. He thinks one Aussie small cap could take off like a rocket if it plays out like he expects. Stay tuned.
Callum Newman+
Editor, Money Weekend
