Is China going to dump their excess metal stockpiles?

February 9th, 2010

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Back in Will there be a commodity price crash?, we wrote about a curious phenomenon in China,

… as prices for base metals rebounded, so did their inventory stockpile levels. This is a tell-tale sign that much of the price rise are due to the rise in investment demand instead of real demand.

When we wrote that article, we should have used the word “speculative” instead of “investment.” Indeed, back in September last year, there were signs of base metal speculation in China, as this Bloomberg article reported (China?s Pig Farmers Amass Copper, Nickel, Sucden Says)

Private investors in China, the world?s largest metals user, have stockpiled ?substantial? quantities of copper as the government ramps up stimulus spending to spur the economy, according to Sucden Financial Ltd.

Pig farmers and other speculators may have amassed more than 50,000 metric tons, Jeremy Goldwyn, who oversees business development in Asia for London-based Sucden, wrote in an e- mailed report after a visit to China. That?s about half the level of inventories tallied by the Shanghai Futures Exchange, which stood last week at a two-year high of 97,396 tons.

Sucden?s estimate underscores the difficulty analysts face in gauging metals demand in China amid increased speculation by retail investors, whose holdings remain outside the reporting framework undertaken by exchanges. Private investors in China also had as much as 20,000 tons of nickel, Goldwyn wrote.

This is a tell-tale sign that the ‘demand’ for base metals from China is not fully substantiated by the demand from the real economy. Even the demand from the real economy are not fully substantiated by the real needs of the people. To understand what we mean by that, think of where all these credit and stimulus money has gone to in China. It has been reported that most of them had gone to fixed asset investments and infrastructure. But according to Marc Faber in a recent interview (and many eye-witness report), there’s an oversupply of apartments and commercial real estate in China i.e. vacancies are already too high. Therefore, the pace of China’s fixed asset investments have to slow down. Should that happen, you can be certain that demand for steel and cement will fall substantially. That means the demand for Australian iron ore is going to fall as well.

Now, we are hearing rumours that the Chinese are trying to offload their excess metals. As this article reported (Rogue Aluminium Shipments Suggest Chinese Metal Stockpiles are Being Re-Exported),

Something strange happened in Japan in December. Shipments of aluminum from Mozambique and Brazil showed up in the northwestern ports of Fushiki and Fukui.

Shipping aluminum to Japan isn’t weird. The nation is an important consumer. But shipping South American and African aluminum to northwest Japan is strange.

These are minor ports. Usually such imports would be unloaded on the Pacific side, at Yokohama, Osaka or Nagoya.

Where did this “rogue aluminum” come from? Traders think it might be from China.

Not only that, according to that article, there’s a divergence between the Baltic Dry Index and Chinese Shipping Index.

Next, listen to what Marc Faber has to say:

What is the implication for Australia? If you accept the theory that Australia owes much of its economic rebound from Chinese demand for Australian resources, then what follows will be very negative for the Australian economy. As we wrote in Hazard ahead for Australia- interim crash in China,

Therefore, investors should understand this basic principle: because of the leverage that Australia is exposed to China, any slowdown in China will have a leveraged effect on Australia.

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