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Which Commodites Are Most Levered To A Chinese Crash
Back in April 2014, the main reason why we said buying Glencore CDS is the best way to trade the upcoming Chinese credit-commodity crunch was because it was basically stacking leverage, with CDS being a massively levered way to short credit, upon leverage as Glencore had $1.2 billion of profit exposure to every 10% drop in copper, upon leverage, as copper is in turn levered to China's credit bubble, upon even more leverage, with Glencore's dirty not so little secret of $100 billion in counterparty exposure now revealed.
This combination of leverage upon leverage upon leverage upon leverage, coupled with the anticipated China "hard landing" catalyst, made long Glencore CDS (which were then trading near record tight levels) not only the best-performing trade of 2015, but as we expected, turned into the best way to trade China's economic slowdown and alleged hard-landing: alternatively, anyone who had shorted Chinese equities in anticipation of China's various bubbles bursting when the SHCOMP was at 2000 over a year ago, is now flipping burgers.
But another question has emerged in recent days: is copper truly the most levered way to bet on China? According to a new analysis by Goldman, copper is "only" the third most levered commodity to Chinese demand.
As the bank notes, in its latest bearish note on the commodity space (perhaps a reason in itself to buy commodities), beyond the obvious relationship that strong (weak) Chinese growth equals rising (falling) commodity prices, its "China Leverage Score (see Exhibit 1) attempts to provide a simple composite measure of which commodities are most exposed to China demand, by combining share in global demand (squared) plus net imports (as a share of global demand)."
More:
While this provides a good “first glance”, going beyond a cursory look paints a much more complex picture for most commodities. Some of the less obvious facets of Chinese commodity demand are:
- Where China is an intensive consumer of a particular commodity, it tends to import that commodity in large amounts, even if it already has substantial domestic production capacity. This is because China plays a key role across value chains: China produces raw commodities (especially metal ores), refines imported and domestic raw commodities (in particular iron ore and coking coal into steel, and to a lesser extent crude oil into oil products), and also turns refined commodities into manufactured goods for export (in particular, petrochemicals, copper and aluminum).
- China has also made substantial strides towards metals independence over recent years thanks to new production technologies such as nickel pig iron (leading to a decline in leverage score for the most “leveraged” commodities). As such, China has become the largest exporter of refined metals such as aluminum and steel over recent years, despite also fulfilling robust domestic demand for these metals (by domestic investment projects and the export-led manufacturing sectors).
- A key drawback of this larger and more integrated role in commodity production is that lower commodity prices are now far less stimulative for China than they would have been several years ago. On net, lower oil prices are still very likely to provide a positive effect on Chinese oil demand and the overall economy. Yet, lower metal prices, other than copper, are likely to reinforce weakness in some of the key Chinese heavy industries centered on commodity production.
So for those seeking the next (massively levered) Glencore, by shorting those with most exposure to Iron, Nickel and Zinc (3 of the top 4 most levered commodities to China aside from copper), here is the place to start.
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all i know is that New York is sure scared of $16 phony paper price...
http://www.kitco.com/charts/livesilver.html
all i know is scrap silver has a huge premiium attached to it.
a good resource for PM prices
https://comparegoldprices.com/
https://comparesilverprices.com/
Thanks for the chart, is very useful.
"all i know is that New York is sure scared of $16 phony paper price..." - Kaiser Sousa
Please elaborate why you think that is the case, given that silver has zero chance of backing any currency in the world, and that its other uses and demand are mostly saturated. Even if it went up to, say, $50 overnight, it won't matter to potential buyers: if they won't gobble up tons of it at $15, they won't be doing at $50.
Therefore, this smacks of wishful thinking by current silver owners or silver miners, agents and shills, who are hoping and dreaming of cashing in. Not that there is anything wrong with that hope or dream, but as many have said before "Hope is not an actionable strategy".
I dunno....a few thousand years of history with several round trips down the fiat merry go round has proven that silver and gold are pretty decent holders of value.
I am not suggesting we are going to go back to a silver based dollar, but someone might. If there are real cash shortages, who knows...that sack of silver coins I have sitting on my desk might just come in handy.
Gold is, but silver is also an industrial metal now
If gold is a pet rock, I guess that makes silver a pet boulder?
And fiat is your imaginary friend.
good stuff. ty
silver has zero chance of backing any currency in the world, and that its other uses and demand are mostly saturated.
A Bald assumption.- Def
A statement that is made the reader/listener as factual without any evidence whatsoever.
I would suggest you apply at CNN or Fox. Your future would be bright.
Also, since you mentioned it has Zero chance. Chance involves probability. To help you understand the almost impossibility of that statement I will use an old adage.
If I gave a billion chimpanzees a typewriter, in a few years time one of them would eventually produce a full version of "War and Peace"
"If I gave a billion chimpanzees a typewriter, in a few years time one of them would eventually produce a full version of "War and Peace"
Damn! I must be doing something wrong. My monkey banged out 'Dreams of My Father'
lol, good one.Not that I would waste a second of my time reading any of his drivel, I thought it was "The Audacity of Hope".
The internet has proven that theory incorrect.
How about giving a billion chimps one typewriter per chimp. It takes much more time if they have to share "a typewriter". Just making sure we have the odds stated correctly. ;>)
i like the soybean trade. damn they eat a lot of soybeans. a little distribution clitch(edit: i obviously have more important things on my mind), some bad weather in nebraska or russia or some asshole american president doing something stupid and there is huge upside against minimal downside.
Surprised that lumber hasn't made the list!!!
crude is so low?