Bounce, Fail: Real Chinese Steel Rebar Prices Falling Again
- Real Rebar Prices: The Hedgeye Industrials team often finds local commodity price data easier to use than Chinese economic figures. Significant global industrial resources are devoted to supplying China’s fixed asset investment (FAI) boom. Tracking construction-related commodity prices, like domestic rebar prices adjusted for inflation, may provide us with timely information on Chinese activity.
- Negative Indicator for Chinese FAI: Real rebar prices are ~4% below 2009 lows, which is not a good signal for mining capital investment or Chinese construction activity, in our view.
- Currency Relationship: China pegs its currency to the USD and commodity prices are often responsive to currency moves. Chinese rebar prices show a modest negative correlation to the USD Index.
- Residual Suggests Sustained Weakness: Looking at moves in excess of those driven by currency (the residual of the regression to the USD Index), we see cause for concern in the Chinese construction related steel markets. The residual has been below its currency implied value for several months and is rising again.
- CAT Exposed: We believe Caterpillar is exposed to the potential popping of the mining capital investment bubble, which was in large part inflated by Chinese FAI. CAT has acquired mining related businesses and invested in production capacity for mining equipment at what we believe is (roughly) a cycle peak.
- Coal & Energy Capex Additional CAT Concerns: Global adoption of innovative gas extraction techniques may result in long-term weakness in coal mining capital investment. As we wrote on Monday in Overweight Capital Goods? Wrong Question, But Probably Not, growth in energy related capital investment is already elevated (chart courtesy Kevin Kaiser, Hedgeye Energy).
- CAT Risky, In Our View: We continue to think that the downside risks in CAT are not reflected in the current share price.
Jay Van Sciver, CFA
HEDGEYE RISK MANAGEMENT
120 Wooster St.
New York, NY 10012