Sputtering Copper Miner Rally Eyes China

A three-month-long upturn in global stock markets since March 10^th has sparked a wave of optimism that the worst bear-market since the 1930’s has finally come to a merciful end and the rocky road to economic recovery lie ahead. The S&P-500’s stunning +42% rebound from the March lows, has been dubbed the“Green Shoots” Rally, - by Federal Reserve chief Ben “Bubbles” Bernanke, who on March 15^th, predicted that America’s worst recession since the 1930’s, would likely end this year before a recovery gathers steam in 2010.

“The green shoots of economic revival are already evident,” Bernanke told CBS’s program "60-Minutes". “Much depends on fixing the banking system. We’re working on it. I think we’ll get it stabilized, and see the recession coming to an end this year. We’ll see recovery beginning next year, and it will pick-up steam over time,” Bernanke predicted. Since then, the combined market capitalization of the NYSE and Nasdaq has rebounded by roughly $1.6-trillion, while stock markets worldwide have recovered $8.7-trillion of their losses from the eighteen-month bear market.

Just a few days earlier, Bernanke joined Congressional leaders, in exerting heavy political pressure on FASB, to alter rule #157, which had previously forced American bankers to value their toxic assets, at mark-to-market prices. Succumbing to the pressure on April 2^nd, FASB changed rule #157 to permit “mark-to-make-believe” accounting - a scheme that allows the banking elite to conceal their losses, and use obscure and discredited models to inflate their balance sheets and income.

Combined with the Fed’s shift to nuclear “Quantitative Easing” on March 18^th, - printing $1.75-trillion off the electronic printing press, to buy mortgage and Treasury bonds, the “Plunge Protection Team” (PPT) engineered a liquidity driven rally, reckoning the “wealth effect” from rising equity prices can lift consumer confidence. The “green-shoots” rally isn’t based on a genuine strengthening of the US-economy, but rather, is based upon accounting gimmickry and money printing.

Wall Street Oligarchs have seized upon trillions in US-taxpayer bailout money and government guarantees, to bolster their balance sheets and generate profits, while channeling excess cash into turbulent financial markets. Tracking the global “green-shoots” recovery rally, are key industrial commodities, such as crude oil and copper, which are sensitive to the outlook for the global economy, and the US-dollar’s exchange rate. Leading the global stock markets higher this year, are the BRIC countries, Brazil, Russia, India, and China. Together, the four BRIC nations account for 15% of the $61-trillion global economy.

Last week, the closely watched Shanghai red-chip index rose to a 10-month-high of 2,787, awash with freshly printed yuan by the Chinese central bank. The Shanghai index is +64% above its November low, when Chinese Premier Wen Jiabao signaled a 4-trillion yuan ($586-billion) spending plan on infrastructure, to revive growth in the world’s third- largest economy. Since then, Chinese banks extended an additional 6-trillion yuan in new loans, partly channeled into the stock market.

A booming Chinese stock market has provided a big psychological lift for the London copper market, which has produced even bigger gains, up +87% from the December low of $2,800 /ton, to as high as $5,250 /ton last week. But Shanghai red-chips are racing ahead much faster than underlying profits, and now trade at 28-times earnings compared with a P/E of 12.8 in November. Valuations are distorted due to massive expansion of the Chinese money supply, so copper traders are watching how Shanghai red-chips behave, after central bank Governor Zhou Xiaochuan said he is prepared to “fine-tune” monetary policy.

Responding to Beijing’s 4-trillion yuan ($585-billion) stimulus package, China’s factory index expanded in March for the first time in six-months, telegraphed by the Purchasing Manager’s Index (PMI), which rose to a seasonally adjusted 52.4 in March from 49 in February. Government spending on factories, construction of airports, highways, other public works and fixed assets soared +33% in the first five-months of this year, helping to offset sharp -26.4% drop in exports.

Fiscal spending also has fueled a rise in imports of iron ore and other raw materials. By volume, Chinese copper imports soared by an eye-popping 326% in May, iron ore by 37.4%, and steel by 23% from the same period in 2008. Oil imports rose 5.5-percent. Yet after the new infrastructure is built, Beijing must confront the new reality - foreign customers are buying fewer Chinese goods. Exports to the European Union, China’s biggest market, plunged -41% to $17.3-billion, and exports to the US plunged -27% to $16.7-billion in May, compared to a year ago.

Not surprisingly, the world’s two largest copper miners, Freeport McMoran Copper & Gold (FCX), and Southern Copper (PCU), are closely tracking copper prices in London and Shanghai, in addition to the general swings in global stock market indexes. Copper itself, given its wide uses in electronics and construction, is seen as a bellwether of global economic conditions.

China, the world’s top consumer of copper and aluminum, imported 422,700-tons of copper in May, up +5.7% from April’s previous record high of 399,800-tons. As a result, unsold inventories of copper held in London warehouses, have been whittled down to around 290,000-tons last week, compared with 545,600-tons in February. “Even though we have gone through a worldwide recession, copper inventories globally are very low,” said FCX chief Richard Adkerson on June 10^th.

“Demand in North America, Europe, and Japan continues to be weak, but events in China will be what drives the copper price in the near term,” he said. Until global copper supplies are whittled down further, FCX chief Adkerson sees no need to restart idled copper operations, despite a pick-up in Chinese buying that has driven the red metal to a seven-month high. “A production restart is as complex as a shutdown, and would be based on judgment about the sustainability of a recovery. It’s not something we have in our mind that when a specific event occurs it will be time to turn on the switch,” Adkerson added.

Traders in copper and FCX must learn to juggle variables such as the direction of volatile global stock markets and LME copper inventories, but there is also a third wildcard - the direction of the Euro versus the US$. Freeport is expected to sell slightly less copper – 955-million pounds versus 1-billion pounds -- in the second quarter than the first, but more gold, 650,000 ounces. In the first quarter, its gold sales nearly doubled to 545,000 ounces from the fourth quarter.

With copper prices 50% below their record peak levels of 2008, FCX is selling more on gold to boost cash flow. Gold, viewed as a hedge against monetary abuse by central bankers, is perched above $900 /ounce, and gyrating alongside swings in the Euro’s exchange rate with the US-dollar. The Euro peaked on June 3^rd, near $1.4300 before sliding to $1.3800 on June 15^th, after Fed chief Bernanke warned Congress, that the US-central bank wouldn’t monetize any more of the Treasury’s debt, beyond the $300-billion of purchases already pledged on March 18^th.

Bernanke’s warning was issued soon after Beijing warned the Fed against excessive money printing, and Qatar, one of the world’s largest investors through a sovereign wealth fund, said it would reconsider linking its currency to the US-dollar and instead, diversify investments away from the greenback. On June 16^th, Fed governor Kevin Warsh warned the “Fed will not compromise price stability, buy monetizing large US-budget deficits,” adding that "financial markets may extract penalty pricing if fiscal authorities are unable to return to sustainable budgets."

As for the future direction of the global “green-shoots” rally, Warsh warned, “The indiscriminate bounce off the bottom, across virtually all assets and geographies -- may be more indicative of a one-time reset. The panic’s hasty retreat should not be confused with robust recovery. Private demand, the true arbiter of economic performance, remains weak and the jobless rate is likely to peak at a higher rate, and linger longer at high rates, than in recent recessions. I would expect business and consumer spending to disappoint for the next several quarters.”

Comments

[Ben Gee:]

Are we going to see another commodity price bubble? Increased commodity prices will slow down the world economic recovery. Will the Chinese recovery do more good than harm?

Jun 17 10:33 AM

[Mad Hedge F...:]

Short term, it's overdone. I have to tell you that my old friend, Dr. Copper, the only commodity that has a PhD in economics, has decisively broken resistance at $2.25 and hit a new high for the year at $2.40, up 78% from the year’s low. If you recall, I was feverishly pounding on the table trying to get people to buy the red metal at $1.35 in January (see www.madhedgefundtrader... ) . I also was pushing the world’s largest copper producer, Freeport McMoran (FCX) at $30. Is this the definitive breakout that will lead us into the next leg of the global equity bull market? I don’t know, but there is one thing that makes me feel queasy. Our illustrious state’s public employee pension fund, CALPERS, has announced that it is again making asset allocations to the commodities area. When they did this a year ago, it all ended in tears, putting in the spike tops in every commodity across the board, followed by the mother of all crashes. California teachers saw their pension payments cut. You would think that once burned is twice forewarned. Is history about to repeat itself? CALPERS, with $170 billion in assets, down a third from the peak, it’s just too big to play in this space. This is the playground of end commodity producers and professional traders. It’s like sharing a very small cage with a very large, 800 pound gorilla. All they can do is damage. Better for them to go back to being a closet global index fund. But keep an eye on Dr. Copper anyway.

Jun 17 02:13 PM

[Sovestor:]

Investing is easy if you want to keep it simple. Use country-specific index fund rather than sector specific, not alone commodity specific. Be wise, keep it simple.

Jun 18 03:43 AM

[TinyTim:]

"awash with freshly printed yuan by the Chinese central bank. The Shanghai index is +64% above its November low, when Chinese Premier Wen Jiabao signaled a 4-trillion yuan ($586-billion) spending plan on infrastructure, to revive growth in the world’s third- largest economy"

So is the Premier Helicopter Wen?

Jun 18 04:36 PM