Let's talk China: Episode 5 of 7

In this episode, we discuss China's 2nd of 5 economic paths it can follow.

This episode will also focus on Xi the leader. To understand Xi means to better understand China's economic path forward.

1/n #China Can China replace malinvestment with more consumption?

Answer: Maybe a little bit & over a long time frame, but President Xi does not want to focus on this path. Instead, he wants to implement his socialist utopia.

2/n

Let's talk China, shall we? Episode 4 of 7

In this episode, we discuss China's investment-led growth model & the first of 5 economic paths China can follow.

As you would expect, also this episode is full of Chinese characteristics!

1/n #China Starting in 1990s, China’s economic engine has been fueled by capital investments.

Its central planning bureau defined GDP targets, picked winners and drove growth from debt-driven capital formations (green line).

2/n

Let's talk China, shall we?

Over the past 3 years, we made some controversial calls in commodities. We decided to exit our oil holding in Aug 2022, we went short natgas in early 2023 or called for copper to go lower in May.

Why? Because we have an egde on China.

1/n #China Yes, mainstream media picked up pace on important issues facing China today.

Most came to understand that the property bubble burst, that the economy is slowing, that geopolitical frictions are emerging, that there is too much debt.

But do they understand the underlying forces that drive these issues?

2/n

Pre-2020, Gold had one marginal buyer, that being gold-backed ETFs.

Today, gold has at least 3 marginal buyers that can overlap or alternate each other. They are:

- Gold backed Western ETFs (which buy, sell or hold based on US real rates);

- Central Banks seeking higher gold reserves (China; India; Thailand; Vietnam; Qatar, KSA or even Poland) for geopolitical & other reasons;

- Chinese & other Asian wholesale or retail market participants and professional speculators;

Who bought most last? India!

Why? The government cut import duties on gold by 9% at end of July, triggering a renewed surge in demand. “The impact of the duty cut was unprecedented, it was incredible,” said Philip Newman, managing director of Metals Focus in London. “It really brought consumers in.”

At least for now, there seems to be always somebody.

1/n Note however that Chinese retail buying has slowed down recently, as best illustrated by the Shanghai gold premium over international prices.

I will elaborate on the Chinese retail clients more soon.

2/n

In 2023, I said I will tweet less about oil and I will stick to this promise but today I make an exception and will break the promise as we enter a period of more volatility for oil...

So let's talk about OPEC and Saudi market share. It's decision making time.

1/n

https://twitter.com/BurggrabenH/status/1731701359257190453

Step by step:

The Saudis decided to keep oil from falling <$75 for 2y by cutting overproportionally in their OPEC+ quota context.

They have cap for 12mbpd but produce 9mbpd. It was 10.5mbpd in 2022. Pick a number but they are 15-20% below their fair share.

2/n

Let me share some real time data on the EU natgas market that are hard to get.

European gas consumption for 28 countries matches last's years to the cubic meter (Oct 2022 - Oct 2023 = Year 2022).

However, consumption remains 17% below 2019/20 season.

Is there a supply issue? Rubbish. The global LNG market is oversupplied from every corner; EU storages will be filled by end of Aug where we sit. We have too much gas.

#TTF 1/4 (in mcm/day and YTD) Three factors matter why there is less consumption vs 2019/20 season:

1) Milder weather: 70% of total consumption is temperature related. Temperatures are milder, thus Europe consumes 14% less vs 2019/20.

Is that permenant? It sure looks like a trend where I sit. But climate scientists can answer that best.

Households Consumption; 2/4

Nvidia sold a lot of new AI chips over the past 18 months and is forecast to grow its unit sales aggressively.

But does everybody understand what such forecast would mean for electricity demand in the West?

A 🧵

1/n #AI Step by step:

The average Swiss household consumes 4000-5000kWh of power pa. It is similar for most Western HH.

Let’s assume a 4-person household consumes 5000kWh per annum.

That translates into 570 Watt per hour (5000 x 1000 / 365 days / 24h)…

2/n

India likes a "GOOD" deal - also in crude oil - and is about to teach Russia a lesson what that means.

Spoiler 1: it's not a pretty one!
Spoiler 2: China & Turkey will learn quickly..!

Let's look at the Indian-Russo crude oil bromance.

1/x Thread Before the invasion in Feb 2022, Russia exported some 2.8mbpd (55%) of its 5.5mbpd crude to Europe by way of pipeline (Druzhba) & sea transportation (seaborne).

But not just crude oil...

2/x

For now, Red Sea disruptions due to Houthi attacking commercial vessels randomly remains a ton-mile story, not a crude oil story.

Within different shipping segments the picture of diverting cargo around the Suez Canal remains a Container Vessel story, to a less extent also a Product Tanker & Crude Oil tanker story.

1/5 Some high frequency data...!

https://x.com/BurggrabenH/status/1746159260742844911?s=20

Container Vessels owners have been the most consequent in diverting cargo.

Since Nov, the number of container vessels crossing the Suez Canal has collapsed by 80% in both directions.

2/n

Brazil is is an interesting microcosm to study in the oil industry.

It's a large, growing consumer of petroleum products. It's the 8th largest producer of crude oil in Dec 2023 as well as a large producer & consumer of biofuels.

Most importantly, it's energy agency reports the data in detail & timely (unlike most countries globally).

1/n Brazil's resource wealth (mainly offshore) is well documented but it struggled for years to follow through.

Finally, it does with an exit rate of 3.9mbpd of oil production in 2023. Only the US, SA, RUS, CAD, IRQ, CN & IRN (incl condi; in this order) produced more that month. That's 50% growth since Jan 2018!

2/n

Shall we look at the European NatGas market together?

Will Europe have to freeze this winter, after much mild weather luck last winter?
Will TTF drag coal prices up as last winter?

Thread
1/n Our rolling forecast upfront for those of you with a little ADD:

Best-estimate today, Europe will exit the winter 23/24 in March at or around 40% storage levels (red line) which suggests TTF doesn't have to spike, ceteris paribus. Is it a bear? Neither.

Let me explain.

2/n

Are you monitoring Chinese gasoline consumption, metals demand or Battery Electric Vehicles sales?

I don't care, pay close attention to what @BYDCompany is doing. They are the real thing. Charlie & Buffett explained it many years ago.

1/n A thread
x.com/BYDCompany/sta… In 2023, BYD will sell some 3 million passanger cars, of which 1.5m will likely be Battery Electric Vehicles (BEV) & the rest Plug-in Hybrids (PHEV). At least that is what we see coming from tracking monthly figures.

2/n Note: table incomplete due to poor company breakouts

Let's take a closer look at who is the lair, shall we?

After all, the chap has some followers and what's to save the planet from "anti-greenwashers".

Well, let us find out from whom humanity needs to be saved.

1/n

https://twitter.com/KetanJ0/status/1660262870863446016

First, let's look at my original tweet in which I made a specific statement:

"20 years of 🇩🇪 Energiewende has systematically starved the largest grid in Europe of excess electricity while tripling prices for consumers."

I showed May as an example

2/n

https://twitter.com/BurggrabenH/status/1659986924113899520?s=20

Let's talk Realpolitik, the West and China.

My view: unless the West get its decarbonisation targets & deadlines in line with China (& India), reducing CO2 is 100% risk and 0% reward.

A thread...!

1/n @INArteCarloDoss

https://twitter.com/BurggrabenH/status/1655545244983623682?s=20

What drives policy?

In short: @IPCC_CH. Scientists there believe an increase of 1.5C is the “safe limit” for global warming while higher temperatures may change the environment and, perhaps, transform our way of life.

2/n

Asian refinery margins are getting weaker over last few weeks. Asian diesel premium over Dubai crude for one suggests the refinery party over as new capacity is finally coming online.

1/n Singapore Hydrocracking margin over Dubai seems near zero now. That's bad business.

2/n

Goldman estimates the debt racked up by China’s provincial governments at $23 trillion — 126% of gross domestic product — if their off-budget borrowing is included. So here comes the first province, Guizhou, that tries to avoid a default…!

#China @foxglobalinvest Some context

DNO & other Kurdish oil producers such as Gulf Keystone have been instructed by the Kurdistan Regional Gov to temporarily cease deliveries of oil to the Iraq-Turkey BOTAS pipeline for export.

1/3 Green pipe below It follows an arbitration ruling in favor of Iraq against Turkey-state owned pipeline operator BOTAS for transporting Kurdish oil without prior approval from Baghdad. Not sure what it means. Likely some future fee sharing after months of negotiation? Any view @AzizSapphire?

2/2

An observation on gold.

In the below thread from November 2020 I explained a few basics on gold and that the marginal buyer of gold are gold-backed ETFs (not central banks or physical retail buyers in Asia).

1/n

https://twitter.com/burggrabenh/status/1332810525760172033

Gold-backed ETFs get inflows on the basis of real rates, i.e. the difference of nominal yields and inflation expectations (same duration).

They buy more (have higher inflows) the more negative real rates become, as seen post covid, and sell as real yields increase.

2/n

I got a little excited about the S&P500 going up each day lately.

I feel like I’m missing out, a guess like a @agnostoxxx’s monkeys.

So I consider buying some here. But what is it worth? I don’t know and nobody on CNBC wants to tell me.

1/n #SPX So I decided to look at SPX like a giant American Corporation (let me call it “ACo”) with a market cap of US$33 trillion - genius, isn’t it?

2/n

In my X-mas tweet I told you that China was already open from a crude buying perspective and that China will slow down imports as it risks hitting product tank-tops. Was I right?

Let us look into this 4 weeks more data.

1/n @UrbanKaoboy @kittysquiddy

https://twitter.com/BurggrabenH/status/1606459855170060288?s=20&t=zkGN8iKBEzXG0ALU6dgRHw

First, some argued that "China re-opening is bullish oil". Few had data and some looked at them the wrong way on top.

Yes, China discharged 11.075mbpd crude & condi in Dec, the highest discharge in all of 2022 & one of the highest numbers ever. My "China IS OPEN" pitch!

2/n

Let me address the Tailwind Energy acquisition as proposed by @SericaEnergyplc management @MitchFleggCEO, given we are days away from submitting our vote on it.

For full disclosure, Burggraben holds 3.4m shares (1.2%) of $SQZ.

1/n Upfront, is the acquisition accretive or not?

Answer: yes it is.

Using the same assumptions (price deck; FX; etc), SQZ's intrinsic value on a standalone basis is 310p per share (NAV table on left) vs 449p post acquisition. That is a value increase of 45%.

2/n