22 July 2013

QUANTITATIVE STRATEGY
ACTION & RECOMMENDATION Last year I thought that China was finally beginning the rebalancing process, but another burst of government spending proved me wrong. I am wary of crying wolf but it is still a question of when, China rebalances not if. More importantly I am increasingly sceptical that there is a middle ground to the slow down, either China gets stimulus and growth holds up in the short term or it doesn't get stimulus and growth step changes materially lower. If China slows down then international assets will outperform Australian, for Australian market focussed investors the next best thing will be stocks with exposure to international markets excluding resources. Subtitle Left Aligned and in Title Case China: how slow, how soon? While the longer term path to China rebalancing is relatively clear, in the short term the key to the rebalancing process rests with a small number of government officials in China who are not celebrated for transparency. So, while I prefer to invest on the basis that China will slow, another round of fiscal stimulus is a material risk to that view. The key issues are: 1. How much ideological conviction do Chinese politicians have in rebalancing: The first steps to rebalancing are easy, the hard part is once vested interest start to feel economic pain and exert grassroots political pressure. Does the current Chinese leadership have the political and ideological wherewithal to push through the measures required or will they reverse? This is biggest unknown. 2. Where is the point of no return: When an economy is dominated by investment like China, it relies on economic growth to encourage further investment which creates more growth and hides past mistakes. However, if the growth slows too much then the economy will hit a point of no return where the losses on prior investment discourage future investment and the model unravels usually dramatically. The level at which this is an issue is a guess I am thinking the point is somewhere around 5% nominal growth. 3. What scope does China have to stimulate if things get worse?: Debt levels have increased substantially since the Chinese stimulus of 2008/ 2009 which greatly limits the scope of future stimulus. FIGURE 1: CHINA URBANISATION THE 1ST DERIVATIVE MATTERS
m People 1,100 1,000 900 800 700 600 500 400 300 1990 2000 2010 2020 2030 2040 Source: Wilson HTM, RBA Equities Research Quantitative Strategy Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document. Damien Klassen damien.klassen@wilsonhtm.com.au Tel. +61 2 8247 3101

Total urban population World Bank forecasts(LH)

m People 30 25

Annual change in urban population (RH)

20 15 10

The number of people living in Chinese cities is expected to grow for another 20 years

BUT the number moving to cities will decline rapidly in coming years

5 0

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This document is organised into two parts: 1. An analysis of the current issues and how events could play out 2. A longer term look at why rebalancing is needed.

Current Issues
HOW MUCH IDEOLOGICAL CONVICTION DO CHINESE POLITICIANS HAVE IN REBALANCING: There is broad acknowledgement in China that the economy needs to rebalance away from investment to more consumption, former Premier Wen described Chinese growth as unbalanced, uncoordinated, and unsustainable and the incoming leadership have discussed the need for the rebalancing. However the first steps to rebalancing are easy, the hard part is once vested interests start to feel economic pain and start to exert grassroots political pressure. While Chinese GDP growth has been impressive, the growth has not been evenly dispersed among Chinese citizens. Estimates of the Gini coefficient, which measures inequality, have grown dramatically in China and it is now one of the highest in the world. FIGURE 2: CHINESE GINI COEFFICIENT

Source: National Bureau of Statistics (NBS) , China Statistical Yearbook, China Statistics Press, Beijing, Huang & Wang

This creates a number of issues. I am going to ignore the potential for large scale political upheaval, not because it is unlikely but because human beings have proven to be very poor at predicting regime change and I am unlikely to be any better. Its a risk that needs to be kept in mind, but there is little an investor can do right now as regimes can last decades beyond expectations or fall within weeks of all of the experts suggesting there is no possibility. What the imbalances do create though is the bane of political systems the world over and something I am much more comfortable forecasting political self interest. The GINI coefficient above shows that the growth in wealth for a number of people within China has been spectacular and based on the existing arrangements where investment growth is high. Additionally local governments are highly reliant on land sales to developers. Reports about Chinese party officials owning tens or even hundreds of properties, plus that China does not rate well on most measures of corruption (on the Transparency International th 2012 study China was ranked 80 , citing graft, bribery, embezzlement, backdoor deals, nepotism, patronage, and statistical falsification) suggests that the relationship between party officials and developers is unlikely to be entirely above board.
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So, rebalancing means less investment which then means less chance for lower level communist party officials to supplement their income. As rebalancing occurs it will create (probably quite intense) political pressure for Chinese leadership. Does the Chinese leadership have the fortitude to stand up to vested interests? No one knows probably not even the Chinese leadership. What this means for investors is that it is wise to position portfolios for a rebalancing, but to be mindful that as the rebalancing occurs that there will be a risk that leadership will cave to vested interests and begin a round of stimulus.

WHERE IS THE POINT OF NO RETURN? My thesis is that there are points of stability in any economy, if an economy grows too fast above the point of stability then eventually you get overheating and a recession in order to reset growth levels to a more sustainable level. For China my contention is that there are two points of stability. One is at 8-10% GDP growth where the growth in the economy is enough that it can sustain further investment growth (for a few years but not many) despite the low returns on investment. However, if economic growth drops below the critical point then there is the possibility (probability?) of financial crisis while investment levels reset themselves to sustainable levels. Where is the critical point? Impossible to predict. I am pretty sure 0% nominal growth is low enough to spark a crisis and 10% nominal growth is probably high enough to avoid a crisis (at least in the short term) but beyond that it will be about watching indicators. There are a number of sub-issues here: High growth in an economy encourages more investment In a high growth economy investment mistakes are less important When investment becomes too large of a part of the economy then economic growth starts to depend on growth in investment rather than the return on investment

When economic growth drops too low then all of these factors can unravel quickly.

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High growth in an economy encourages more investment To a certain extent growth is often reinforcing in an economy. High rates of growth attract more investment capital which in itself helps to grow the economy. FIGURE 3: INVESTMENT CYCLES
6. Economy bottoms but little investment due to prior losses 1. Investment returns high. More investment attracted

5. Investment returns fall further, new investment dries up

2. Extra investment increases economic growth rates

4. Economic slowdown, possible debt crisis

3. More investment capital attracted and so investment returns fall

Source: Wilson HTM

However the process is self-reinforcing on both the way up and on the way down. If economic growth slows below a certain level then potential investors are less likely to invest and the rates of investment can drop precipitously. High growth in an economy hides investment mistakes At a high economic growth rate mis-investment is less of a problem. For example $1b mis-invested while an economy is growing at nominal growth rates of 15%+ (as China has) becomes less of a problem every year after 5 years an economy with growth rates like 15% has doubled in size and so the problem has shrunk and can be written off / down with more ease. However, as an economy starts to slow prior investment mistakes do not shrink as quickly (in a relative sense) and so a slowing economic growth can also be selfreinforcing as fewer projects are saved by growth and the projects that do fail make up a larger proportion of the economy.. When investment becomes too large of a part of the economy then economic growth starts to depend on growth in investment rather than the return on investment Ordinarily investment makes up 10-20% of an economy and what is important over the medium term is that the investment earns an appropriate return which then grows the economy.

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However, investment in China is at unprecedented levels, making up around 50% of the Chinese economy (see chart below): FIGURE 4: INVESTMENT AS A % OF GDP

Source: IMF, Alsosprachanalyst.com

What this means is that while return on investment is inescapably important for the longer term, for the short term the most important thing is the change of investment dollars itself the tail wagging the dog.

WHAT SCOPE DOES CHINA HAVE TO STIMULATE Not as much as you might remember from a few years ago. Total social financing (which is a curious Chinese measure of both debt outstanding and equity raised) has increased relatively dramatically in recent years, and is now close to 200% of GDP. FIGURE 5: SOCIAL FINANCE (% GDP)

Source: IMF Equities Research Quantitative Strategy 5

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Looking at peer economies, Chinas stock of credit is among the highest in the world for economies with a similar level of GDP per capita. FIGURE 6: NET DOMESTIC CREDIT VS GDP / CAPITA (% GDP)

China has more debt than most similar countries

Source: IMF

Finally, and just as interestingly, the IMF calculate an augmented level of government debt where they add in the debts accrued by local government land financing deals and other off balance sheet transactions by governments in China. The conclusion is that the level of government deficit is closer to 10 percent of GDP, which would put it at one of the highest government deficits in the world. FIGURE 7: AUGMENTED GOVERNMENT DEFICIT

Source: IMF

Putting it all together adds up to a view of a greatly reduced capacity for the Chinese government to launch stimulus packages, and if the IMF calculations are correct then the government will struggle to maintain current levels of spending for more than a handful of years.
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SOME OTHER QUESTIONS AND ANSWERS We have recently seen instability in interbank lending rates what do these portend? In the weeks prior to 30 June 2013 interbank lending rates spiked higher, with some suggesting that it was the start of a financial crisis and others suggesting that it was an intentional move by the central bank to rein in shadow banking. It is unlikely in my view that a central bank would risk the financial system in order to get the banks to rein in lending. A more likely answer is that rates spiked higher and the central bank was caught off guard. To the extent that swerving into on-coming traffic gets the screaming kids in the back seat to finally shut up, the central bank is probably quietly pleased, but I doubt it is an exercise they would intentionally repeat. While I wont go as far as to suggest that it was the start of a financial crisis, but what it does suggest is that there are considerable imbalances in the Chinese economy that will continue create issues that will require intervention. And this means there is a chance of policy mistakes and unintended consequences. Are Wealth Management Products and shadow banking accidents waiting to happen? Basically these are products designed to get around banking regulations and controls and they would appear to carry a lot of risk. It would appear as well that these products pay a low amount of interest for the level of risk that backs the loan, and that the loans are being largely used to fund property development. So, all of the ingredients are there for a debt crisis. Now that does not mean that a loan crisis is inevitable, but given the growth rate in the number of these products it suggests that these products could turn a relatively a minor debt crisis into a more major one..

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Why will China rebalance

The biggest risk to Australian economic growth continues to be a significant slowdown in Chinese growth. Our base case is for a hard landing in the construction sector in China. While there may yet be a soft landing overall (largely dependent on government stimulus) what matters for the Australian economy, and in particular for the resource sector is what happens in the construction sector. Booms last for longer than most people expect at the start and then finish faster than anyone expects at the end. The question of whether China will soft or hard land is a little academic (for Australia) though, because with so much of our economy geared to resources what really matters is whether fixed investment slows. The Chinese economy could grow at 5% (a hard landing) but if made from significant construction but low consumption growth then commodity prices could well increase. On the other hand, 9% GDP growth made up of a massive increase in consumption but negative growth in construction could be dire for commodity prices and Australia. Our thesis is: China has been over-investing for some time and since 2009, the Chinese stimulus has been focussed on building projects that were big users of steel. Iron ore and coking coal are two of Australias largest exports, both key inputs in steel making. The Chinese economy needs to re-balance to be more consumption led, and the Chinese 5 year plan agrees. Working the numbers, a good outcome would be Chinese investment growth close to 0% in the medium term. China is getting very close to an inflection point in their urbanisation path where urbanisation will continue, but the absolute number of people moving to urban areas will decline (see chart below). None of these are necessarily sell right now issues. If Chinese authorities wish they could easily launch a stimulus package that would put these issues onto the back burner, although the longer they extend the spending the harder the eventual decline will be. Regardless, at some stage over the next few years the level of building in China will decline considerably. Will that time be now? Maybe.

FIGURE 8: TYPICAL URBANISATION PATH OF A DEVELOPING COUNTRY

China Urban population as % of total

Low growth that starts to accelerate

However once you pass the mid point growth slows

Past the midpoint, the absolute number of people being urbanised (i.e. needing a home built) is lower every year

Time Source: Wilson HTM

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A BRING FORWARD OF DEMAND? Given the apparent over-construction of housing in particular following the huge fiscal stimulus post-2008 financial crisis, it is likely that this component of GDP will slow more sharply than the rest of the economy. In effect, some of the construction for the urbanisation of the population has been brought forward. Figure 9 shows the growth in fixed asset investment in China over recent years the fiscal stimulus post 2008 financial crisis is clear and we do not expect to see a similar stimulus again not only because it appears to have created an overhang of the stock of housing but it also created the inflationary pressures that required a foot on the policy brake. W hile we will go through a period of payback after such a building surge, the urbanisation of China still has many years to run if previous countries experiences are anything to go by. However, for Australian resource companies as China continues to progress from a developing to a developed economy the real question is what level of building is sustainable? FIGURE 9: CHINA FIXED ASSET INVESTMENT (YOY %)
36 34 32 30 % 28 26

24
22 20 2007 2008 2009 2010 2011 2012

Source: Bloomberg, WHTM

THE CHINA INVESTMENT PUZZLE While investment is generally a good thing, at some stage you can have too much of a good thing. Specifically, investment which is debt funded and does not earn a high enough return to pay back the debt is not good investment. Judging the return on an investment is hard enough to measure for commercial operations, but when you are building public structures like bridges or roads then measuring the return is even harder again. So is China earning an economic return on its investment? When you look at a country like China 20-30 years ago with little investment, just starting to invest then they will generally choose the most efficient investments first (give or take) and as time goes on they start to invest in projects than earn a lower and lower marginal return. At some stage, if investment is high enough, this return will fall below the cost of capital the key question is when? In our view China is likely to have reached this level. While it is possible that China can keep increasing its investment, any increase from here is likely only to make the bubble bigger. China already spends a prodigious amount on investment 50% of the GDP is spent at the moment which is well over the rate achieved in a range of other economies during their growth phases:

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FIGURE 10: INVESTMENT AS A % OF GDP

Source: IMF, Alsosprachanalyst.com

REBALANCING So, if we assume that at some stage the Chinese economy will rebalance, then the key questions become how and when? For the how does China rebalance? question, we are unsure - in the vast majority of similar cases, investment spending continues to increase as long as it can before ending in a crash (eg Japan, the Asian crisis, Russia etc). Basically, the level of investment spending gets so high the entire economy becomes dependent on creating investment and it is hard politically to diversify away from this as it involves short term pain for a longer term gain. However, there is the hope that this time China will be able to rebalance more gradually they have recognised the problem at least in their five year plan, the question is whether politically it is possible to make the change given: it is likely to generate higher short term unemployment local governments have become dependent on profits from land sales vested interests will likely lobby to maintain the construction spend

Forgetting the political issues for a moment, lets make the assumption that China wanted to rebalance smoothly over the next 10 years back to 50% consumption, 30% investment (which would still put them at the top of the chart above). What growth rates would have to occur for this to happen (see Figure 11)?

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FIGURE 11: A (HYPOTHETICAL) SMOOTH PATH TO REBALANCING

% of GDP 60% 50% 40% 30% 20% 10% 0% 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Consumption Government Spending Investment

Source: Wilson HTM

The maths is relatively simple on an economy-wide basis. GDP = consumption + investment + government spending + net exports. Lets assume exports and government spending net out to not change as a proportion of GDP (arguably net exports will probably decrease as Chinese consumption growth is likely to exceed consumption growth in the rest of the world while government spending will probably increase due to increased social services). So, we are left with the two key variables, consumption which is around 33% of GDP and investment which is around 50% and we want to know the growth rate which will reverse these numbers. If consumption started growing at 12% real (say 15-16% nominal growth) and gradually edged down to 8% (11-12% nominal) per annum over the next 10 years, then investment would have no real growth at all in order to rebalance the Chinese economy We can play with those numbers a lot, but realistically there is a limit to how fast consumption can grow, and even if you increase the starting growth rate of consumption to 15% and extend the period to 15 years rather than 10 you still only get investment growth rates of around 5-6%. So, the question is whether China does it the easy way with very low to no growth in investment or the hard way with lots of investment growth for as long as possible followed by negative investment growth. The path most countries take is the hard one politically it is too hard to make the change, there are too many vested interests, and its too easy to hope that this time will be different. Support for this argument lies in the capacity utilisation rate in China (i.e. how much of the prior investment is actually being used) we see in Figure 12FIGURE 12 that Chinas capacity utilisation is at around 60%, not only far below typical international utilisation rates of around 80%, but also well below Chinas own history

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FIGURE 12: CAPACITY UTILISATION

Source: IMF

So, not only has China spent a far greater proportion of GDP on investment than any other developing economy, it would appear that so little of the recent investment is being used that the total capacity has declined to 60%. But China is such a poor country surely it still needs to invest? Absolutely. We are not advocating that China never invests again even if it keeps the dollar level of investment flat it will still be spending a huge amount on investment more than any other major economy as a proportion of GDP. The important point is that we dont think that investment is likely to grow from current levels, and there are downside risks. Take for example urbanisation. China has been urbanising between 1.2% and 1.6% of its population every year roughly 20-25m people. But this number is not likely to grow. The number of people living in cities is growing but the number of people moving to cities is not see Figure 13 below. FIGURE 13: CHINESE URBAN POPULATION RBA FORECAST
m People 1100 1000 900 800 700 600 500 400 300 1990 2000 2010 2020 2030 2040 m People 30

25

Annual change in urban population (RH)

20

15

Total urban population (LH)

10

Source: RBA, CEIC, United Nations for total urban population, Wilson HTM calculated the change implied

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If China builds enough houses and infrastructure last year to move 25m people into cities, it does not need to move 30m people into cities this year in fact the likelihood is that while the total urban population will grow, the absolute number of people moving to cities each year is likely to fall as you can see above from the red line. RESIDENTIAL CONSTRUCTION THE KEY VARIABLE: The use of steel in China is varied (see Figure 14 below), but by far the largest proportion of this steel is used in the construction of property and infrastructure over 55% of steel used. FIGURE 14: STEEL USE IN CHINA Home Appliances, 2% Other, 14%

Rail, Shipping, 5%

Automobiles, 6%

Construction, 55%

Machinery, 18%

Source: Roberts & Rush 2010

While we acknowledge that some infrastructure is independent of the building of residential property, a significant proportion of the infrastructure build is dependent on the residential property build i.e. if China builds less residential property per annum then they will need fewer roads and bridges per annum to connect new areas, fewer new train lines and fewer airports per annum etc. So, we focus on the residential construction cycle where fortunately last year the RBA wrote a discussion paper from which we include a number of interesting charts below. First, is the RBAs take on urban construction completed where we see the floor space completed below. The interesting thing for us is that the rate of completion increased sharply following the Chinese stimulus package in 2008.

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FIGURE 15: CHINA URBAN FLOOR SPACE COMPLETED

Source: RBA

So based on these figures, if we assume that there is about 24.5sqm per person then this implies that China finished enough houses in 2010 and 2011 to urbanise 9% (just under 4.5% per annum) of the Chinese population. Plus there was enough houses for almost another 1% per annum of the population to move into a new rural house. However, the urbanisation rate in China has been pretty consistent and has not significantly increased, it is still around 1.5% per annum. This suggests there were only three other explanations for where the property is going: A sudden increase in the size of each apartment: Now, this factor is the least likely to have had a sudden increase, the increase in size is generally a slow and steady one for most economies so while it would have played some small part, in the absence of even anecdotal evidence we assume this not to have been the main driver of the significant increase. A sudden increase in the number of demolitions: This does appear to be true as official stats indicate that from 2008-2011 that around 4% of properties per annum were demolished. While further statistics are hard to find, the Beijing Year book for 2009 suggests that there were 6.2x more demolitions in the first 9 months of 2009 compared to 2008, further supporting this view. A sudden increase in the number of vacant properties. This is a favourite argument of most China bears. While it may well be true, there are not a lot of direct statistics to back this up most of the statistics are indirect ones (eg water or electricity use) or anecdotal ones.

So, while we dont know which of the above are playing the key role (and all three are probably having some effect) , for property building to continue at the current high level (i.e. 4.5% of the Chinese population) either the significant increase in demolitions needs to be maintained (i.e. knock down enough buildings to create demand for the new ones that are being built) or the number of unused apartments needs to increase.

Either way this path is unsustainable in the medium term.

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THE PATH TO URBANISATION Could China increase its urbanisation rate so that the building boom continues? We showed in Figure 8 above that China has left the steep part of the urbanisation curve and moved onto the less steep part of the curve indicating that while China has been urbanising around 20m people per annum that this number is now set to fall. For China to urbanise 4% of people per annum would be off the charts compared to any prior experience. Figure 16 below (apologies for the number of lines) shows the urbanisation path of 20 countries that urbanised since 1950, centred (on 0) at the current Chinese urban population and showing the growth path for the next 15 years: FIGURE 16: URBAN POPULATION AS A % OF TOTAL POPULATION
Brazil Hungary Malaysia China Iran Mexico Colombia Iraq Norway Cuba Ireland Russia Czech Rep. Japan Spain Finland Korea, Rep. Turkey Greece Lebanon Ukraine

80 75 70 65 60 55 50 45 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9

High Growth = South Korea, Lebanon Med Growth = includes Russia

Low Growth = includes Japan

10 11 12 13 14 15

Source: World Bank

So, we can see from this graph that there are 3 key groupings: The high growth countries: This included only two countries, South Korea and Lebanon which continued to urbanise around 1.5% of their populations per annum The medium growth countries: A range of countries slowed their rate of growth down to around 1% per year, including Russia The low growth countries: another group of countries slowed even further, with urbanisation rates pulling back to around 0.7% per annum this group includes Japan.

Most forecasters, including the World Bank have China following a path similar to Russia. So, China has been urbanising at around 1.5% of its population per year, and the best that any other country has been able to do is to maintain that rate the more likely path is that China will slow soon to around 1% of its population per year.

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Adding it all up, the answer is that it looks highly unlikely that China could expand its urbanisation rate to the 3-4% necessary to justify building the number of apartments that it did over the last few years. OTHER ARGUMENTS SUGGESTING INCREASED STEEL DEMAND How about steel use as China is building taller apartments that will need more steel wont the steel use per dwelling increase? Yes, dwellings in China will likely increase in size, and there will be more apartments which use considerably more steel. So, the steel usage will not decline as fast as the number of dwellings built, but this effect is unlikely to be large enough for steel consumption to grow in any meaningful way. What about India dont they have a lot of people and a significant amount of infrastructure to build as well? Yes, and five years ago it seemed like a reasonable proposition that India would soon be ready to start on the path of increased urbanisation. Unfortunately, five years on it does not seem likely that any urbanisation programs are imminent. India generally has very low levels of investment and a bloated bureaucratic process that tends to stifle new investment. While the potential is there, it could still be there in another ten years. What about Africa dont they have a lot of people and a significant amount of infrastructure to build as well? Yes, but generally countries are not ready for the urbanisation / investment path taken by a number of developing countries. Additionally, Africa has a lot of iron ore, but not the infrastructure to get it out. Therefore it may be that when Africa is ready for that stage of development that they will also have enough iron ore to satisfy the demand. Once again while the potential is there, it will probably still just be potential in another ten years. How about recycling? Steel recycling is not particularly significant in China largely as historically China didnt use much steel and so there is simply not the supply of scrap. However, as time goes on the level of scrap and recycling is likely to increase, which will also lower the demand for fresh iron ore. What about the recent Reserve Bank of Australia (RBA) white paper that concluded that steel usage was going to increase? The RBA recently published an analysis of steel use in China and the chart below shows their estimate for residential construction. While we have no issue with the majority of the assumptions used in their analysis, we do have a significant problem with their assumption of the level of demolition activity in China. Effectively they take the increased level of demolitions and extend it for 15 years at an elevated (but gradually declining) level. We dont agree with this view we believe that the last 3 years have been an aberration and that knocking down houses to build new ones is a short term stimulus led strategy that is unlikely to be sustained.

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Below is Figure 17 showing the approximate difference between their methodology and ours. FIGURE 17: URBAN RESIDENTIAL CONSTRUCTION

RBA Estimate

Wilson HTM estimate

Source: Purple line = CEIC actuals, RBA estimates. Red line = WHTM estimate of a more normal demolition rate

What about steel intensity (i.e. the amount of steel used per capita) doesnt China have a long way to go on that measure? This is an argument that suggests that China will increase its use of steel on a per capita basis for a while and then it will begin to decline. We have a few issues with this as a concept. China is already at a similar level of steel use per capita relative to other economies, so it is an argument that China will increase beyond other countries first before declining. There is generally less steel used now in the consumption of many buildings and cars, and so comparing the steel use of a country that is developing now vs a country that was developing 50 years ago could create some issues. The key comparison on this analysis is almost always South Korea. However this argument is undermined by: 1. South Korea is an outlier that uses significantly more steel than other countries 2. Partly this is due to South Korea urbanising faster than any other country 3. It is also due to the high level of exports per capita in particular ships and cars While there may be scope for China to displace some of the ship or car exports, this will not create a greater demand for steel in the world, merely displace steel demand from South Korea to China.

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FIGURE 18: CRUDE STEEL OUTPUT PER CAPITA

Given the increase in steel use in China over the last 4 years, China is already higher than most developed countries

Source: Huw McKay, Yu Sheng and Ligang Song

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Head of Research Jacqueline Fernley Industrials James Ferrier Ivor Ries Andrew Dalziel Stewart Oldfield Chris Gibson Daniel Wan Healthcare and Biotechnology Shane Storey Daniel Sciberras Resources Cameron Judd Phillip Chippindale Liam Schofield Nathan Szeitli Quantitative Strategy/TAA Damien Klassen

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Equities Research Quantitative Strategy

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