Hog Crisis in China

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  • A pig farm in Yiyang, Henan. China has culled 1.2 million pigs to control a deadly swine fever . (Credit to New York Times)

China’s pork prices hit record levels after an epidemic of African swine fever killed millions of pigs, triggering a severe meat shortage in the world’s top pork consumer.

Pork prices in China surged past 50 yuan ($7.1) per kilogram. According to the data from the Ministry of Agriculture and Rural Affairs in October, pork prices rose more than 100 percent in October from a year earlier, contributing 2.43 percentage points to the CPI rise, and accounting for nearly two-thirds of the year-on-year increase.

For more than a year, China has been trying to contain a vicious epidemic of African swine fever, a highly contagious disease that is harmless to humans but kills almost all infected pigs. The Chinese government announced the first outbreak of the disease in August 2018, and since then, outbreaks have been reported in several provinces across the country.

In response, the authorities banned farmers from feeding swill to pigs. Leftovers are seen as the main channel of transmission to healthy herds because the virus can live for days in feces and raw meat. Officials have imposed quarantine measures and transportation restrictions in areas where the disease has broken out.

However, safety and hygiene standards have been difficult to enforce in China’s millions of small backyard pig farms, which feed most of the country’s pigs. The government says 1.2 million pigs have been culled so far to try to stop the spread of the disease, which is a tiny fraction of the 700 million pigs slaughtered in China last year.


In a supermarket located in Beijing, the pork counter reads jokingly “pork supports installment payment”. (Credit to Abuoluowang.com.)

Analysts estimate that pork prices could double by the end of 2018. As officials prepare for bigger price increases, Beijing will be faced a growing number of challenges.

To offset the surge of pork prices, officials subsidized about 3.2 billion yuan ($452 million) to low-income families who are struggling to afford pork.

Chinese authorities have also asked local governments to free up money that could be used for artificial insemination technology, a way to encourage farmers and producers to breed more hogs. The Chinese government has also drafted plans to increase subsidies, loan support and insurance coverage for the pig industry in the country.

Moreover, the Chinese government released 1,500 metric tons of pig meat in the past two months, and the majority of those were frozen pork reserves. China set up a national strategic pork reserve in the 1970s as a way to deal with emergencies and stabilize pork prices.

Although the Chinese government hasn’t released a report on the amount of frozen pork in its reserve yet, experts warn that the Chinese government may not be well prepared enough to deal with the pork crisis.

“China’s pork shortage will worsen in the rest of the year, but the government doesn’t have effective methods to fill the gap in the short term,” said Chen Wen, the Wanlian Securities analyst.

Chen estimates that China will face a shortage of about 10.8 million tons of pork this year. She added that China’s supply of frozen reserves isn’t enough to make up for that.

Kweichow Moutai becomes the first 1000-yuan stock in China

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The iconic baijiu produced by Kweichow Moutai.
(Photo credit to Kweichow Moutai’s official website)

After exceeding 1,000 yuan ($145) per share, Kweichow Moutai, the Chinese liquor giant’s share became the most expensive stock in China’s A-share market on June 27, 2019, aided by ever-growing demand.

While investors and analysts were not surprised by the strong performance of Moutai. Analysts from both Bloomberg and China International Capital Corp. Ltd. were optimistic about the continuous growth of Moutai’s share and raised their expected price of the stock.

A last-year forecast from Bloomberg predicted that Moutai’s share would hit the 1,000-yuan mark in 2019. Moreover, Tingzhi Xing, an analyst of China International Capital Corp. Ltd., also forecasted that 1,250 yuan would be the target price within 12 months.

Kweichow Moutai is a distillery from Moutai town in southwestern China’s Guizhou province. Moutai is famous for its iconic premium baijiu, a sorghum-based liquor, and it is usually used to serve at business meetings and official banquets. In 1972, Moutai was used to entertain President Richard Nixon on his historic visit to China.

President Richard Nixon and Prime Minister Enlai Zhou were tasting Moutai at the reception dinner in 1972. (Photo credit to news.ifeng.com)

Just as the western world’s obsession with premium wines, Chinese consumers are fond of baijiu. Thus, the consumption of high-quality baijiu in China is vast and still growing. As a representative of high-end baijiu, Moutai creates considerable profits.

According to the data cited by China Daily, an official Chinese English-language newspaper, the total revenue was 75 billion yuan, and its net profit was 34 billion yuan in 2018. Both its total revenue and net profit increased 23% over the previous year. Furthermore, the sales of Moutai rose 14% over 2018 to 100 billion yuan in total, and its net profit achieved by 45 billion yuan.

Another report released by China’s Guizhou province shows that the overall GDP of Guizhou province is 1.48 trillion yuan, and Moutai’s value now attained 1.24 trillion yuan in 2018. It means that the value of Moutai dominates nearly 85% of provincial GDP.

(Photo credit to Bloomberg)

Besides being the most valuable stock in China’s A-share market, Kweichow Moutai also surpassed Diageo in 2017 and became the most valuable liquor company in the world, according to Refinitiv, a financial technology and data company based in London. Diageo is a British multinational drinks company and the owner of Johnnie Walker.

Due to the generous profits and ever-increasing demands of Moutai, analysts foresaw that the price of Moutai’s share would keep going in the future. “I can’t see any growth cap on the company in the long run, unless the Chinese don’t drink one day,” fund manager Dai Ming told WARC, the global specialist information company, in a marketing report. “The liquor culture is deep-rooted in China, and when you do business here, you drink. It’s a product with demand outstripping supply, so growth is quite visible.”

U.S. Electric​ cars are becoming cheaper – but with new threats and challenges

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Considering buying an electric car? Now might be a good time. The sales of electric vehicles (EV) are increasing both globally and nationwide – and the prices are going down year by year. 

Globally, the market for electric vehicles has grown rapidly over the years. In California, even while sales of cars have fallen in the state through the first half of 2019, sales of electric cars have soared from 3.3 percent of the market in 2018 to 5.6 percent in 2019.

There are a steady increase and a spike in the import price of electric motors, which are essential for plug-in hybrid electric vehicles. According to the observatory of economic complexity, the top exporters of Electric Motors are China ($12.9B), and the top importers are the United States ($9.6B). With the ongoing trade war between China and the United States, the import price of electric motors would likely go up for a while, adding to the producer price index (PPI) of electric cars made in the U.S. 

Import Price Index (Harmonized System): Electric motors and generators (excludes generating sets)

However, the median electric car in the U.S. is getting cheaper. Monopolizing the U.S. electric car industry, Tesla could release cheaper median EV models due to the maturity of the technology and the shrinking of EV battery prices. 

The decreasing battery price in the U.S. reflects a larger picture in the global battery market. The leading factors? Cobalt and lithium, two major components of the electric car battery – are becoming cheaper and cheaper.

Lithium experienced dramatic price movements, rapid demand growth, and supply deficit for refined products in recent years. However, prices are expected to fall in 2019 and after.

Lithium’s price is expected to fall in 2019 and after.

The cobalt industry also experienced a huge price surge in 2017 due to the growing sales of electric cars. It hit a 10-year peak of more than $40 a pound in April 2018 and fell back to $13 a pound in March in 2019. And its price is expected to continue to drop.

Cobalt’s price is expected to continue to drop.

According to Henry Sanderson from Financial Times, the dramatic rise in prices in 2017 was driven in part by stockpiling in China. This year, much of that inventory has come on to the market, pushing down prices. 

With the continuous slide of prices for these raw materials, it is possible that the suppliers may cut their supply until the prices go up to their expected level. But in the short-term, the shrinking cost battery will further push down the electric car price tags. 

However, considering China’s grip on the lithium needed for batteries – a single Chinese company has “effective control over nearly half the current global production of lithium” –  the trade war could greatly hurt American batteries and the electric car industry. Same for the cobalt. China was the world’s leading producer of refined cobalt and a leading supplier of cobalt imports to the United States. Unless Tesla comes up with new technology to reduce cobalt usage in its car battery, the U.S.-China tension will not help the U.S. electric car industry. 

Meanwhile, China seems to be benefiting more from the price drop of cobalt and lithium. Because China, not Tesla, is driving the electric-car revolution globally.

Since the beginning of the EV project in the early 21st century, the Chinese government has been backing up the industry by spending billions of dollars to subsidize manufacturing of electric vehicles and batteries and encouraging consumption. By 2015, electric vehicle sales in China had surpassed U.S. levels. In 2018, Chinese sales topped 1.1 million cars, more than 55% of all electric vehicles sold in the world.

Moreover, China has been aiming at the American market and challenging Tesla by introducing Chinese electric cars to the U.S. So far they have been largely successful until yesterday when Nio, a Shanghai-based Tesla-challenger, faced consecutive huge losses under the government-backed bursting bubble. 

To help the industry stand on its own and avoid a bubble, China has gradually scaled back subsidies since 2017 and is phasing out the subsidy program by the end of 2020. While it seems to lead to a hard time for Nio, it is unknown how much impact this decision will have on the overall Chinese EV industry.

Another potential backfire resides in resource and sustainability. The huge market for electric cars fuels the expanding demand for these raw materials – and the market (so does the demand) seems to be expanding exponentially. However, there is a limited amount of minerals on earth. Especially for cobalt, most of which came from Congo, exhaustion is predictable under such avaricious exploitation. Additionally, the illegal use of child labor, the contaminated environment, and the threatened human rights for Congolese add to the complexity of the issue. If the unlimited desire exceeds the limited amount of resources someday, we will likely face another mineral resource crisis.







Reference:

“After US$5 Billion in Losses, China’s Tesla Fights to Survive.” South China Morning Post, 23 Sept. 2019, https://www.scmp.com/tech/big-tech/article/3029968/after-us5-billion-losses-chinas-tesla-challenger-nio-fights-survive.

Clemente, Jude. “Trade War With China Exposes U.S. Mineral Import Problem.” Forbes, Forbes Magazine, 11 July 2018, https://www.forbes.com/sites/judeclemente/2018/07/11/trade-war-with-china-exposes-u-s-mineral-import-problem/#be6c9cb21044.

“Cobalt.” OEC, https://oec.world/en/profile/hs92/8105/.

“Cobalt.” Cobalt | 2019 | Data | Chart | Calendar | Forecast | News, https://tradingeconomics.com/commodity/cobalt.

Coren, Michael J. “The Median Electric Car in the US Is Getting Cheaper.” Quartz, Quartz, 6 Sept. 2019, https://qz.com/1695602/the-average-electric-vehicle-is-getting-cheaper-in-the-us/#targetText=The median electric car in the US is getting cheaper&targetText=Data analyzed by research house,price of $38,990 before incentives.

Evarts, Eric C. “Electric Car Sales Boom in California, as Plug-in Hybrids and Small Cars Sputter.” Green Car Reports, 4 Sept. 2019, https://www.greencarreports.com/news/1124891_electric-car-sales-boom-in-california-as-plug-in-hybrids-and-small-cars-sputter.

“Expanding Electric-Vehicle Adoption despite Early Growing Pains.” McKinsey & Company, https://www.mckinsey.com/industries/automotive-and-assembly/our-insights/expanding-electric-vehicle-adoption-despite-early-growing-pains#targetText=What is the Electric Vehicle,plug-in hybrid EVs).

“Import Price Index (Harmonized System): Electric Motors and Generators (Excludes Generating Sets).” FRED, 13 Sept. 2019, https://fred.stlouisfed.org/series/IP8501.

“Lithium.” Lithium | 2019 | Data | Chart | Calendar | Forecast | News, https://tradingeconomics.com/commodity/lithium.

“US EV Sales Surpass 2% In 2018 – 9 EV Sales Charts.” CleanTechnica, 13 Jan. 2019, https://cleantechnica.com/2019/01/12/us-ev-sales-surpass-2-for-2018-8-more-sales-charts/.