China Signals End of Commodity Stockpiling

According to the Brisbane Times (Australia), Chinese officials stated they will end their stockpiling of raw materials.

It is likely that the commodities rally of the past few months was mainly driven by Chinese strategic stockpiling. If the stockpiling comes to an end, and there are no other major buyers, commodity prices could potentially crash by 20-50% from their recent highs.

If commodities crash, equities could fall in tandem. It is possible that the entire commodities / equities rally and economic ‘green shoots’ were spillover effects of Chinese stockpiling.

In a way, the Chinese stockpiling could be viewed as a global fiscal stimulus package. Take away the stimulus too early (like in the 1930s US and 1990s Japan) and the economy crashes.

The unknown variable is the degree to which Chinese stockpiling contributed to the global rally. We’re at a critical inflection point and all we can do is wait and see.

China signals end of stockpiling

John Garnaut, Beijing

June 30, 2009

A RECORD-BREAKING run of commodities exports to China that has sustained the Australian economy may be set to end, with Beijing officials and advisers announcing an end to “strategic” stockpiling, and massive iron ore contracts likely to expire today.

The complete article is here.

If stockpiling had a major influence over the rally, perhaps enough momentum has been generated to keep the global economy moving forward.

Or perhaps the ‘recovery’ of the past few months has been a complete illusion supported by Chinese spending and rapidly buying up cheap commodities around the world. If it was all an illusion, I wouldn’t be surprised to see markets re-test their lows.

Comments

[CautiousInv...:]

All of the dry bulk containers ships are bound for China, with demand arising from strategic stockpiling, stimulus spending and speculation.

Surprisingly, in my view, this has been viewed as an indication of economic recovery when it is clear there is no final demand beyond China's borders.

China' State Board, who is anything but dumb, will not continue to compete against itself and bid up prices in abundant commodities. And speculation owing to stimulus lending spilling unto the hands of arbitrageurs is certain to end.

Together these developments will remove the pricing floor beneath the commodities China has been hoarding.

Jul 05 07:37 AM

[nmelendez:]

Except for food...:)

Jul 05 10:44 AM

[Teutonic Kn...:]

They probably realized by now that hoarding commodities would be a premature move, and now putting on the brakes.

The worldwide economic resurgence is still sometime away.

My guess? ~2012.

Jul 05 01:01 PM

[Spook:]

Agree with CautiousInvestor, China have been hoarding commodities when recession hit, with 2 trillion in reserve, it can afford to buy all the raw materials available.

But isn't it coincidental that China will stop hoarding raw materials 4 days after talk with Rio Tinto on iron ore price cut failed to materialized?


> All of the dry bulk containers ships are bound for China, with demand
> arising from strategic stockpiling, stimulus spending and speculation.
>
>
> Surprisingly, in my view, this has been viewed as an indication of
> economic recovery when it is clear there is no final demand beyond
> China's borders.
>
> China' State Board, who is anything but dumb, will not continue to
> compete against itself and bid up prices in abundant commodities.
> And speculation owing to stimulus lending spilling unto the hands
> of arbitrageurs is certain to end.
>
> Together these developments will remove the pricing floor beneath
> the commodities China has been hoarding.

Jul 05 11:41 PM

[Mark Anthony:]

Speculation that China is halting commodities stockpiling is completely unfounded.

Mr. Yu Dongming is the head of the ono-ferrous metals and construction materials department of China's Development and Reform Committee. Please note, this is a think tank entity, not the actual policy maker. Yu himself had said he "speculate" that the government will not continue the stockpiling. He is at too low a position to have anything to do with policy making.

Please note, Yu represents the interest of industrial users of the metals, who have vested interest in seeing lower prices.

According to Yu, the China's entity for national stockpiling of metals have accumulated 590 kilotons of aluminum, 150 kilotons of zinc, 235 kilotons of copper, and other materials. That's roughly one pounds of aluminum, 115 grams of zinc and 180 grams of copper per Chinese.

China is a gigantic country. Any stockpiling will take a very long time to accumulate any sgnificant quantity. More over, the main goal of China's stockpiling is to spend out and get rid of its excessive US dollar assets. China is racing against time to divest the dollars before it is too late:
seekingalpha.com/artic...

It is a safe bet that China's commodity buying spree is far from over. Yu is just making some helpful noise to help the on-going iron ores price negotiation.

Jul 06 02:20 AM

[cameroni:]

I wonder too if this announcement is not just a little political in nature diffusing Western concerns over back door dollar-dumping given the G8 will be meeting on Wednesday. I too think stockpiling will resume in earnest when pricing is again working in favor of the only major buyer still standing. By backing off, China can effectively drive it's own discounts and gain more favorable long-term and lower cost commodity contracts.

Jul 06 08:56 AM