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Continued Commentary On The China Commodities Bubble
Despite the numerous anecdotes of disbelieving analysts on Chinese demand, the commodities just keep rolling in to Chinese harbors. Indeed, here at ZH HQ we have been pounding this drum for a while and have had some great guest pieces recently on the topic. The latest article discusses all the long lines in offloading ships while insiders marvel at the lack of exports to drive this seemingly phantom demand. The following quote serves as a great analogy for the Chinese economy as a whole:
“The level of [iron ore] importing doesn't match the level of steel production so far this year, so there's a considerable amount of stockpiling going on,” said Tim Huxley, chief executive of Hong Kong-based Wah Kwong Maritime Transport Holdings, who along with many others in the shipping industry is grateful for what he called “a shot in the arm” but skeptical that the stockpiling can continue – especially since many of those container ships are sent away empty, without export orders to fill them.
To continue the analogy, these "empty containers" are in fact being filled with government stimulus from the Chinese government. None of this is really new, especially to frequent readers of this blog. However, this is a good juncture to look at the drivers and the implications.
- the Chinese government pumping stimulus money into the economy in a directed way (i.e. buying commodities)
This one is very tricky. Unlike other governments' stimulus packages, the Chinese have the capacity to be much more discrete (e.g. state owned corporations, government rebates for cars for unspecified amounts, etc.) leading to a general uncertainty about where the stimulus line ends and market driven demand begins. Especially with political unrest tied to > 8% annual growth, there is a lot to chew on here. Any clear news on this front should be greatly appreciated i.e. China announces an expansion of the original stimulus package.
- the Chinese government diversifying its assets away from exposure to the dollar by stockpiling commodities
We have never really bought this argument because of the relative sizes involved. However, it's worth mentioning simply because of the market psychology entangled in there. We won't know the truth on this one until it's too late anyway but a good indicator would be the SHFE-LME spread.
- the global demand picture
This one is likely to be bearish for any significant time frame involved. With the US consumer moving to a permanently higher level of savings and the other consumption subtitutes hurting with problems of their own, this cannot really be counted on to push commodities for a couple of years (save the occasional June/July run up in oil prices).
- existing stockpiles
At this point, it's pretty clear the Chinese have enough stockpiled to not have this be a serious influence on the supply/demand picture. Of course, this assumes "free markets" and the resultant appropriate demand fundamentals and not that the Chinese are crunching away on iron ore to build bridges to nowhere. There are a lot of things out there masquerading as "stockpile drivers" but the reality is relatively clear.
Ultimately, this battle is going to be won on technicals - painfully obvious, yes but necessary to reiterate for all the China bears who are glued to every news release on electricity output and car sales. There are very few potential fundamental announcements that can prick this bubble and the slow simmer ones have already been bubbling for a while with no effect. As speculators, this one has the potential to salvage many of the wounded and bloodied accounts out there. When the move happens, it will be without warning and it will be swift.
Hat tip to Anton for the article
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Great post. Thanks for the pointer to the G&M piece. Keep it up.
Cornelious, where is the original article that ANTON posted, I can not find it on this site? I need to read it for background reading...
I think that commodities (generally) are setting up for a rebound in prices (two months time). I wouldn't be surprised to see oil on the Sept. contract hit ~55 (perhaps that is a little too much of a lowball price but not outside the realm of reason), at which point I think we may see a sharp turnaround in price because of low interest rates. There is substantial leeway that can be taken in the bond market (short and long term) as well as a dearth of printing (forex) that could all serve to boost commodity prices. Judging from the most recent volume movements in the larger markets (corn, crude, copper etc.) the nearby months and further down the chain, say 2010, there has been a substantial amount of short covering. I would be very tepid or very nimble if I were to begin shorting commodities today.
I agree with you 100% China cannot support this, heck LME stockpile numbers are going up again, but there are many other ways to push prices around especially with very low short term rates. Speculation is pratically encouraged by the Fed right now and commodities are fair game.
I think consumption is part of the picture. What we need to remember is that China has over 2 trillion dollars(most of that denominated in US dollars) worth of reserves.
I think hoarding commodities could be nothing more than a put option on the dollar. China needs to diversify it's reserve holdings and buying large quantities of commodities could be one way of doing that.
Also we have to remember that commodities prices are relatively depressed. Buying large stockpiles when prices are low isn't exactly a bad idea.
Most importantly however China is a growing economy and has now surpassed the US as the world's #1 car market. Even 5 years of 6% growth will result in huge increases in oil consumption on the order of 20-30% and if this happens the commodities will have a rally that will make 2008 look like a warmup.
With all the money the Fed is throwing into the system I think it's just a matter of time before the dollar collapses. Wealth cannot be built on printing paper alone.
i agree about dollar diversification. this is
a back door way to reduce dollar exposure without
spooking the 100s of billions of such assets
remaining on their books.
there is economic growth to consider over a 5
year period and as such there is some merit to
the argument that they are buying low to export
high but western economies will be in no shape
to import massive chinese exports so the stock
piles could serve domestic consumption. but that
is the minority use of the stockpiles.
the dollar hedge is where the chinese mind is.
what?!
Consumption is drying up and has been drying up, that's the point of the post. have you looked at the BDI recently? it's dipping again, we're heading back down, consumption seldom effects commodity prices to the extent that low interest rates and loose monetary policy can.
Commodity prices are not relatively depressed, they are in fact very expensive. Expand your time line from about 1970 onward and you'll see that never in the history of the world have commodities been more expensive. Isn't that the point though, capitalism rewards efficency hence you have lower prices the further out the time line gets drawn? Until you start making multi trillion dollar printer runs and implementing ZIRP. Don't give me the 'inflation adjusted b/s' argument either, that's like those fools who claim their gold should be worth 5000 dollars an ounce or something, to which I say, go find a buyer at 5000 an ounce. Explain to the masses how inflation adjusted oil prices are cheap today....
China and cars is a weird one, I go there a few times a year and sure I see more cars on the road but that too will hit it's nadir soon enough, if it hasn't already. I'd like to get the chance to dig a little deeper and see if the numbers they report even make sense when it comes to cars, I know I've been there when factories were experience rolling blackouts and they reported avg. electricity use. I've been there when there were no blackouts and they claimed usage at all time highs. I don't think you can reconcile what they release with the actual hard data that shows up on imp/exp reports (hows that for second derivative).
For hundreds of years China has been a sort of business shangri la, always the up and comer since Marco Polo first brought back reports. It's always remained up and comer and I don't think this time it will be different.
The dollar won't collapse, stop pushing on that string.
"As I said yesterday, and clearly nobody listened in Australia, this is not the week to be short bulk resources with Chinese gross domestic product numbers being released on Thursday." LOL
http://www.theaustralian.news.com.au/business/story/0,28124,25779680-20142,00.html
how cringe worthy ..... isn't this the same guy that loved Fortescue at $11, $9, $7, $5,....etc etc
Was he shorting them? ;)
I THINK WE BOTH KNOW THE ANSWER TO THAT
THOUSANDS of years. Amen.
The price of gold reflects a roughly ten-times levered based of paper assets representing gold, i.e. gold ETFs, inflated paper contracts on the COMEX, etc. If you eliminated trade in all but actual physical bullion, the price of gold would easily surpass $5,000 ounce.
Don't debate me on this, it is.
I am Chumbawamba, and when the dollar collapses, I will chuckle at your naivete.
China really seems to be a wild card here. In the scheme of things, it does have a huge economy, but it just doesn't seem like it's either quite big enough or free enough for anyone to really objectively put expecations on it being able to generate a signifigant positive impact on the world economy the way things are going now.
It just has too many things working against it. You have a population that can't afford to even buy a lot of what they can produce. It's legal system is a huge risk for anyone investing capital. They appear to be resorting to neo-classical economics to sustain growth.
Reports Chinese police may include BHP in 'irregular trading' probe
Sources have signalled that Chinese police have widened their probe into "irregular trading" of iron ore to include BHP Biliton Ltd, The Herald Sunreported.
China's steel industry has been subject to speculation that Rio Tinto Ltd - and possibly BHP - had cancelled sales of iron ore on the spot market in the past week, following the arrest and detention of Shanghai-based Australian mining executive Stern Hu.
http://www.businessspectator.com.au/bs.nsf/Article/Reports-Chinese-police-may-include-BHP-in-irregula-pd20090714-TWMSJ?OpenDocument
ME: CHINA SURE IS GETTING UPPITY...seems like when things don't go their way a la business deals, they spit the dummy pretty hard. CEO's will not feel very comfortable with China's state reaction to the failed Chinalco with RIO TINTO
Cornelius,
I found the link in the article, any chance to make links darker as it shows up on my screen as the same colour as the text in the article, many thanks! :)
Diversifying out of dollars into commodities as a hedge is exactly what they're doing. The fact that you don't buy this explanation based on the relative scales may mean your looking at it in today's value of dollars and commodities. You need to look at from the view of future dollar/commodity values. From that aspect it makes perfect sense. These guys aren't dumb and they have an authoritative regime that makes it easy to do the prudent thing.
I'm with Hugh Hendry on this one. China is building an economy for a $20T US market. The $20T question is when will the US reach that point. If you think (like some fools on CNBC do) that this number will be achieved with 3% GDP growth per anum, good luck with that and by all means buy commodities. From my point of view, the US will not reach that number in 10 years time. If we will still be at $14T in 10 years, I'm a happy guy, since I believe we are in 1930 as far as the economy is concerned. And if the credit clusterfuck is not enough, we will have the baby boomers retiring: they will depress housing, increase healthcare costs AND sell pretty much everything they still own to pay for their golden years.
With Europe in worst shape than the US (as far as demographics is concerned) the Chinese have no choice but to stimulate their consumption. These days they are force feeding shaky loans to the Chinese consumer, trying to prop up a spending spree. $2T dollars is a lot of money, but that's not even 2000 per person. At this point I'm not sure the Chinese government realizes that the consumer in the western countries is not coming back anytime soon at the 2006 level. If I was the central planner in Beijing the only commodities I would be buying would be oil and gas (they have plenty of coal). But iron ore???? For Christ's sake, there will be so much scrap metal laying around when the credit clusterfuck is over that its not even funny.
Speaaking as one of your less informed readers I have two questions regarding the Chinese and their commodities trading. Whatever assitance that can be provided in the growth of understanding of this reader would be appreciated.
How does being the primary source of inflation in the industrial commodities space help an economy that is predicated upon the low price of these same industrial commodities?
If, as some suggest the Chinese are simply buying long as a hedge against further price appreciation (in an era when the Chinese are attempting to talk down the dollar as a means of providing support to their currency peg) or in the anticipation of a rapid reinflation of global economic growth, this in the face of headwinds even I can see (long term trends in savings & deleveraging in the household sector and capacitiy utilization throught the world for a variety of reasons) then who really benefits from the rapid and sustained (to this point) inflating the cost of these primary raw materials?
I think in the short term I have to agree that things could be sketchy for commidties but the Chinese have a time horizon that extends far beyond the next quarter. In that case I think it's very important that China secures resources.
Aside from that what can China really do with it's money buy Microsoft or Boeing, I doubt it. Buy more mortgaged backed securities? Buy more treasury debt as the Obama administration projects trillion dollar deficits for years?
In light of all these options it's pretty obvious that the Chinese have few places to invest their money.
Resources may not be the best investment but to me it's hard to see what else they can do to safely diversify their portfolio.
With Europe and Japan graying European and Japanese government debt doesn't great either. To me at least it seems like China is doing the best it can with it's reserves. If anything the Chinese should be criticised for stock piling commodities too slowly.
Resource plays may not be the best investment but trying collecting on bonds that have defaulted. Just look at GM and Chrysler bond holders, those kinds of return make commodities seem like a safe investment.
I can't figure out why nobody else has speculated on this, but perhaps there is a more nefarious motive to their stockpiling of commodities?
What operation consumes an almost endless amount of commodities, uses idle manufacturing capacity, employes a lot of people, and gives the impression of economic growth? What do authoritarian governments often resort to in order to deflect attention away from their own incompetence?
Is it so hard to believe that the Chinese are just making preparations for a military buildup?
“China’s strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the U.S., Europe, and Japan recover,” said Terry Fanous, a senior vice president in Sydney for Moody’s, adding that the leading economies were not likely to recover until next year.“China’s strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the U.S., Europe, and Japan recover,” said Terry Fanous, a senior vice president in Sydney for Moody’s, adding that the leading economies were not likely to recover until next year.