Australia is a pawn in the international game of commodities

July 2nd, 2009

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Since the lows of March 2009, the stock market had a sustained rally. This rally, as we wrote in Are improving consumer sentiments ?good? news?, drove up consumer confidence, which in turn sparked hopes of an economic ‘recovery.’ That hope is rationalised by the belief that Chinese government’s stimulus spending will spark economic growth, which in turn drive up demand for Australian commodities. The excuse to confirm this belief is the tell-tale ‘sign’ of rising commodities prices.

The hope that rising Chinese stimulus demand (which result in rising commodity prices) will prop up the Australian economy is an optimism that is resting on quicksand.

First, how much of the recent rise in commodity prices is due to real demand? There are reports that China is importing so much iron ore that it is stockpiling them far beyond its needs. As this article opined,

Over the weekend, Michael Sainsbury wrote in The Australian that China has stockpiled a remarkable 100 million tonnes of iron ore. It’s one thing to stockpile copper, but iron ore is not easy to store in such huge quantities.

As we wrote last year in April 2008 at What if the US fall into hyperinflation?, the Chinese are probably

Slowly and quietly diversify away their US dollar reserves. Obviously, none of these countries will be doing so while talking about it with their megaphones- the US dollar will crash straight away if they act so foolishly.

Make no mistake about this. The Chinese are slowly getting rid of their US dollars by buying up assets in strategic foreign resource companies (e.g. Australia’s OZ Minerals) and physical commodities. In fact, their stockpile are satisfying far beyond their immediate needs in this current economic climate. As Marc Faber wrote in his latest market commentary,

[Chinese] exports were down (17.5% in January, 25.7% in February, and 17.1% in March), imports were down, consumer prices were down, producer prices were down, electricity consumption was down, sulfur dioxide emissions were down, water pollution was down, FDI was down, SOE profits were down, and government revenue was down.  Unemployment was undoubtedly way up.

You see what games are the Chinese playing?

Obviously, as the Chinese buys, the speculators will come in and bid up the prices further. Since the Chinese would surely want to get as much bang for their buck by not overpaying for commodities in a rising market, we expect the Chinese to play games with their large commodity stockpiles in an attempt to drive prices down and flush out the speculators. As that article continued,

In my second incident, last week the Chinese were stating in the various metal bulletins that they were going to stop strategic stockpiling of copper, aluminium and other minerals.

What about commodities that the Chinese have in abundance? As we wrote in Chinese strategic plans: control of the supply of rare earth metals, they are engaging in predatory pricing to control the supply of rare earths and therefore control the price. Then, as reported,

The United States and the European Union have filed complaints against China at the World Trade Organisation (WTO) on June 23 accusing Beijing of placing export restrictions on raw materials and partially processed raw materials critical to many industries. The nine materials cited by the United States are bauxite, coke, fluorspar, magnesium, manganese, silicon carbide, silicon metal, yellow phosphorus and zinc. The complaint accuses China of restricting exports, thus creating an unfair advantage by contributing to disparities in prices of these precursor materials inside and outside China.

As you can see, this is the game that China is playing against the United States. Australia is just a pawn in this game.

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