Did China Buy Too Much Copper?

There is some interesting news out of China: they may in fact re-export some of their copper stockpiles. Here is the link to the Bloomberg story “China May Re-Export Copper on Stockpiles.”

While not a rally killer by itself, this is pretty damning evidence that a major part of the rally in commodities came from Chinese stimulus buying. This was more bargain buying than an actual demand driven rally. The news could lead to a good sized move down as demand has not picked up inline with supply and now China is not only done buying but may even start to sell.

As you can see in the chart below, copper has been in a steady uptrend since the end of 2008 and the move preceded the rally in other risk assets that started in March 2009. The trend has been very consistent and is up about 130% in that time. On the chart below you can also see that as China has presumably stopped their buying we have seen a momentum divergence as the copper rally has slowed down. (click on chart twice to enlarge)

Copper

We would be wary of any move higher in copper and are currently looking at some possible shorts in the copper related ETF/ETN products JJC-Copper ETN and DBB-Base Metals ETF on a break of the trend line. If China--which appeared to be the only buyer earlier this year, and is such a huge part of the emerging growth story--has too much then who is left to buy?

Author's Disclosure:

We are not currently long or short any industrial metals but that could change at any time.

Comments

[HaavBline:]

Agree with this call. A correction would be timely as China digest the huge stockpiles of commodities.

Nov 11 01:22 PM

[James Lewis:]

The Chinese are very smart here.

Basically purchased a lot of this inventory at below-value prices due to the financial crisis. By doing so gave everyone confidence they could be relied on to pull the world out of recession. The confidence boost making financial systems and businesses stronger and increasing business activity which increases their export volumes.

Not when prices are high, they will start shifting some of their inventory to London. a) London spot prices are far higher than Shanghai spot prices. b)sitting on nice profit. c) they will get some more fx reserves for their troubles.

China has lots of reserves for sure. What does this say though?
China has lots of everything.

Lots of people.
Lots of USD.
Lots of Gold.
Lots of factories.
Lots of stimuls projects.

People that think they can project China's commodity demand need to stop smoking dope. With the property boom that started 8 months ago and has at least 5-10 years to go, China will need a lot more copper in the years to come.

FACT

Nov 11 02:43 PM

[StockMaster...:]

Yikes, this is not very bullish for equities. Thanks for bringing this to our attention. Copper has a PHD in economics so if that breaks lower that could take the markets down. I hope they sell over 300 slowly, they are usually pretty smart about manipulating markets so they just might.

Nov 11 11:10 PM

[Wildebeest:]

Marc Faber wrote about this kind of scenario in a book a few years ago, although I don't recall him factoring in the amount of speculative buying being funded by zero interest rates (how could he!).

The scenario is one where china, through sheer volume of sales/purchases, can control the market and keep price within a given band. Accumulate at low prices and sell at the top. They know better than anyone else the real demand situation within their country so they act, in effect, like a large insider trader.

Whether that (price control) was their intention of course is another thing. Frankly it made sense, and still does, for them to use US dollars reserves to stockpile non perishable commodities if the price is right.

Nov 13 05:47 PM

[robert.b.fe...:]

Wildebeest: Greetings. I completely agree. No one knows wahat or how much of any thing China is holding. They are buying up massive amounts of everything from chromite to zinc. Folks are speculating that they hold around $2T USD but what if they don't? What if they have unloaded nearly all of their $ assets purchasing every thing else? That would make sense with Terrible Tim's weak $ policies. Then at the appropriate time they decouple their currency from the $ and poof. Yuan goes up dollar tanks and the developed markets are left holding the almost empty bag.

Nov 19 12:15 PM

[Mark Anthony:]

The article you quotes is simply some analysts spreading totally groundless ABSURD rumors, deliberately or ignorantly. And you take it as a fact? You need to use some brain.

Is China going to export copper? Economics 101 says commodities goes from where the price is low, to places where the price is high.

So check your basic facts. Get the metal prices in China from here:
www.asianmetal.cn

And then get the metal prices in international market from here:
www.kitcometals.com/

As it stands, the domestic copper price in China is equivalent to $3.50 per pound, while the international price stands at $3.07 per pound. Which number is higher? I hope your math is good enough to tell me the correct answer.

Would China be exporting copper? Not unless $3.50 < $3.07. The metals analysts are trying to tell you that $3.50 is less than $3.07. Too bad you guys are fooled.

There is a fundamental reason why China is massively hoarding metals and other raw materials, and why the BDI shipping index has been shotting up. Read the analysis:

seekingalpha.com/artic...

and here:

seekingalpha.com/artic...

Nov 19 02:17 PM

[Whippet:]

What an asinine pretense- With Trillions of FRNs, China cannot buy too much of any durable commodity. Period. End of story. There is not a market large enough for China to get rid of its dollars fast enough.

Nov 19 04:51 PM

[David White:]

There are several elements that need to be dealt with. One is new mines. China is developing a huge new copper mine in Afghanistan. It also has Rio Tinto and Ivanhoe developing a new Mongolian copper and gold mine. Both of these are going to be hugely productive mines. This is bound to have an effect on how much copper China will need to import in the future. Several people talk of China exporting copper, but that's not even really the issue. Simply by importing less, the Chinese will have a huge impact on copper prices.

Another element is time. The Chinese have stockpiled copper in 2009 as the prices were low (and they knew they had stimulus projects coming). In the short term they can ease up on their copper buying now that prices have risen. This should negatively impact the near term price of copper.

Further the USD carry trade has caused a near term asset bubble in China. Much of the USD's borrowed have been invested in BRIC countries, especially China. When the USD carry trade unwinds, many of these investors will have to sell assets in order to repay the USD's before they lose too much money. These assets will be Chinese real estate both commercial and residential. These assets will be commodities. This should cause many of these assets classes to lose value in the short term. This will be especially true if the double dip in the recession comes at a nearly co-incident time as the unwinding of the USD carry trade. If this happened, we would not necessarily get huge inflation. However, the USD might appreciate due to a flight to quality currency in a "double dip" -- much as it did in the recent first dip. There are currently many predictions for a slowdown (if not a return to a recession) in 2010.

I should add that very few contest that commodities and/or real estate will go up longer term.

Nov 21 12:23 AM