Is China's Olympics Vacation Affecting Commodities Markets? 16 comments
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We all know the relief madness over the past week or so: Oil got denied when it almost tapped $150 and dived to $123, taking down the rest of the commodities world -- metals, agriculture, coal, you name it. Meanwhile, banks hit a trampoline and the XLF rebounded some 50% off the lows. Yes, it’s great to see gas here down to $4.59 from $4.89 just 2 weeks ago. Sure, maybe it’s the speculators the regulators have now caught, or maybe it’s money coming out to chase the banks off their lows.
But: What if it’s because China has halted a big chunk of its manufacturing to clear the air for the Olympics that starts exactly in 2 weeks? I haven’t figured out the effects yet. Just thinking what will happen starting September, when the Olympics are over, and the China manufacturing beast roars to life again? Devouring commodities for breakfast, lunch, dinner, and a midnight snack 7 days a week - because the Chinese are workaholics and wouldn’t know what to do if they had a day off? (I am serious - this is what my dad tells me from his business trips to China every two months). Sure, one could argue that China has been limiting its manufacturing to clean up its air since early in the year, yet commodities kept climbing. There probably was quite a bit of speculative money or money that sought safe haven away from the banks. However, China did not completely slam on the brakes till recently. And, had China not been slowing down its manufacturing all year, where would commodity prices be even without the speculative money? Would oil be at $150, and in that scenario NOT be due to speculation? Meaning, where should we expect commodities to rebound to once China goes full steam again?
Also, for those hoping China slowed down because the U.S. and Europe have slowed to a crawl, I beg you to do more research and think again. My dad and his business partners are having trouble placing their orders at factories in China because domestic demand is too strong. Factories are actually turning down orders for exports, the very exports that catapulted China’s economy to the fastest growing. If I had to place a wager, I’d bet China’s recent weakness is self-imposed for the Olympics, and not because it’s being dragged down by U.S. slowdown. Again, we Americans always thinking we’re the center of the world, and the rest of the world depends on us. This is a very dangerous tunnel vision and, as Mitt Romney said, will turn us into a second-rate country like France in no time.
My dad is currently visiting factories in China, saying his factories have been required to set aside roughly 20% of steel for China’s domestic use (so he can’t get his products made as they’re exported here to the U.S.) This restriction is because steel mills have been shut down to clear the air for the Olympics. Also, he says China is fixing steel prices 20% - 35% below market prices specifically for the earthquake rebuild. This is to ensure steel availability to the damaged areas.
This corresponds with the following reports from Capital Link Shipping’s Imarex report (yes, shipping research websites are great even if you’re not rolling the dice on a DryShips):
Steel mills affected by the Olympics have finally begun suspending production to ensure clean air in Beijing. Domestic Chinese steel consumption, although very strong, is also expected to come down a bit due to a normal summer lull in consumption. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small steel mills to keep up production. [Imarex July 22, pdf]
And on the July 25h report:
All eyes are on China / Olympics. The skies in Beijing are still smoggy as hell, expectations point to a slowdown in industrial production, but no indication yet of any significant reduction in iron ore imports. The Chinese are good at always keeping us guessing. One important thing to point out: even if shortterm sentiment is a bit iffy, medium-term sentiment is really good considering the period activity we’ve been seeing. Interesting side note: for the most part, there’s a general consensus that dry bulk rates will trend sideways / fall for the Olympics, then rebounded significantly in the fourth quarter and approach record freight levels by the end of the year. [Imarex, July 25 pdf]
Be careful out there. And remember, don’t assume what seems the most logical, or what you want to believe, to be reality. The biggest risk is not knowing, so do your research.
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This article has 16 comments:
Also, As you seem to indicate, it would make sense that the Feds' naked short action was the main driver for the XLF bounce and cash withdrawal from the energy sector. However, I feel that once the irrational rush to financials is over and all the big boys start washing out their profits, we'll see a renewed interest in commodities... End of August looks like a good time to me. And that would be because of the pending end of restrictions on production for the Olympics. Whether or not the reasoning is real is not important. An old Supervisor of mine used to say "Perception is everything!". And although in my mind 'Reality is everything', clearly the market is not a rational exercise.
jegan ;-)
I think his dad has something to do with steel business.
cjct7...
He may have overrated China's importance but some truth lies there.
China require steel for reconstruction of earthquake and flood victims and it will push up prices again when its focus shifts.The author doesnot talk about US or EU consumption but only about increase of Chinese consumption and he is right on that.
Once the Olympics are over China will come back to life as the world's biggest user of commodities in general.
The only commodity that the US uses more than anyone else is Oil. And that is a detriment to the rest of the world. Europe's oil dependence has shrunk and their currency has appreciated. If needed, they can reduce the tax on Petrol to limit the pain at the pump.
John Egan: My dad manufacturers industrial-type hardware and imports them for sale here in the U.S. He uses a lot of steel, zinc, nickel, and copper.
Captain Johann: Yes, U.S. and E.U. still uses steel, but I think with the demise of the U.S. auto and housing industries, and with manufacturing at lows we haven't seen for a long time, industrial exports are the ones holding up U.S. steel demand...and I would group that in with global demand (China included) rather than U.S. demand.
it is romantic to think that the olympics could have this much impact on the worlds commodity prices, but i have yet to see any evidence this is true.
Calvin C.. Metal (MT) has other issues right now. As to whether or not Putin's statement that they will begin to investigate them for illegal price manipulation will come to pass or not, the issue again is the market's 'perception'. You only have to look at what happened to Lukoil's CEO... Eight years later, he's still languishing in a Russian 'gulag' somewhere. Clearly it has been knocked down. But you are right, Russia does seem to be trying to cozy up to China. Makes sense... Watch the stock for price action, because investors in Russia will be the first to know whether or not this investigation is going forward. We little investors will miss the run if it occurs, and clearly, we will be squashed by the market if we guess wrong and jump in early.
Captainjohann.... I doubt that you'll find anyone reading the above article that thinks the Chinese are fools... In fact, trying to figure the Chinese market is why I read extensively. (A good reference for China is "Becoming Your Own China Stock Guru" by Trippon ... It explains a lot about how the market differs from the rest of the world.. ). In fact, your comment on the Indian steel situation has been repeated around the world. Consider that Australia (BHP, RTP for example) have become the materials 'grocery store' for China. But be aware that China is not interested in being subject to the whims of these large corporations as evidenced by their interest in India, Russia, Africa, Canada and So. America. Aside from shipping costs, apparently they have an eye on CVRD (RIO) as a buy (and unfortunately, I keep getting stopped out on every purchase...Damn!) ... And today's S.F. Chronicle had an interesting article regarding Hugo Chavez's attempt to tweak the nose of USA by agreeing to partner with China on a large scale refinery to be built 50-50 on an island off the China coast. The refinery is supposed to be set up particularly to refine Venezuela's brand of 'sour crude'. The article also noted that as part of the deal, China would be selling Chavez some heavy equipment. Three drill rigs are already en route to Venezuela. The article then noted (from several authorities) that it was not very likely that once the equipment sales are complete, that China will follow through on the refinery, as it is cheaper to buy and ship refined product on the open market, rather than importing the raw product to China for refining. I think China plays the negotiation game very well.
Again, to the author; Thanks for an interesting first person perspective.
jegan ;-)
Seekingalpha.com got to proof read the articles before letting the "analysts" publishing them.
Goldman Says Olympics a Two-Month Economic Drag: Chart of Day
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