When it comes to commodity metals, the dead cat no longer bounces.
We showed this last night in "No End In Sight For Commodity Carnage As Chinese Fear Fed Hike Blowback [7]", a post which can be summarized with the following chart showing that at least for nickel, copper, zinc, iron ore and aluminum it will be a very unhappy holiday season:
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The one-word reason for this condition: China, which as documented extensively in the past, has clammed down on its unprecedented credit creation now that its debt/GDP is well over 300% and as a result conventional industries are dying a fast and violent death. In fact, months ago we, jokingly, suggested that what China should do, now that it has scared sellers and shorters to death, is to launch QE where it matters - the commodity space.
That joke has become a reality according to Reuters [9], which reports that China's aluminum and nickel producers have asked Beijing to buy up surplus metal, sources said, the first coordinated effort since 2009 to revive prices suffering their worst rout since the global financial crisis.
The state-controlled metals industry body, China Nonferrous Metals Industry Association, proposed on Monday that the government scoop up aluminum, nickel and minor metals including cobalt and indium, an official at the association and two industry sources with direct knowledge of the matter said. The request was made to the state planner, the National Development and Reform Commission (NDRC).
One Reuters source familiar with the producers' request said the China Nonferrous Metals Industry Association had suggested that the state buys 900,000 tonnes of aluminum, 30,000 tonnes of refined nickel, 40 tonnes of indium, and 400,000 tonnes of zinc.
In other words, everything that is plunging because there is simply no end-demand should simply be bought by the state.
And why not: in "developed" countries, the same thing is being done by central banks, only instead of directly "monetizing" metals, the central banks indirectly push up stock prices which is where 70% of household net worth is located. For China, and largely investment driven economy, the same can be said about commodity prices.
Furthemore, as reported two months ago [10], at current commodity prices, more than half of all companies with debt in the space are unable to make even one interest payment using organic cash flow which makes the decision for Beijing moot: either buy up the excess metals or reap the consequences of mass defaults.
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For now it is not clear if the authorities will agree to the proposal, but as Reuters notes, the approach underlines the extent to which loss-making smelters in the world's top producer and consumer are suffering from prices hovering at or near multi-year lows.
"Major Chinese zinc smelters had already proposed that the sector slashes output by 500,000 tonnes next year, or around one month's production, in an attempt to boost prices. The country's major nickel producers will meet on Friday to discuss potential output cuts of their own."
Reuters further adds that "while the proposal does not include copper, it is likely to revive memories of 2009, when the State Reserve Bureau (SRB) in Beijing swooped in to buy more than 700,000 tonnes of copper on the domestic and international markets."
Prices were languishing at around $3,000 per tonne at the time, and the buying spree reversed the falls and ultimately helped to propel prices to record highs above $10,000 per tonne in February, 2011. The SRB considers copper a strategic metal. The SRB is controlled by the NDRC, and any state purchases of most commodities are normally approved by the planner and executed by the bureau.
The bottom line is that China's entire metals industry just requested a stated bailout, and as Reuters states the push to get the government to bail out the industry is likely to stir debate over whether Chinese producers in particular are doing enough to limit oversupply that is overwhelming global demand.
Unless there is one, the global deflationary wave is set to continue:
In the United States, aluminum smelters have blamed ballooning exports from China for hurting international prices.
Nickel prices on the London Metal Exchange, which sets the benchmark for global trade, plunged to their lowest in more than a decade on Monday amid concerns about waning demand from China, the world's second-largest economy.
Few, if any smelters, are making a healthy profit at prices as low as $8,200 per tonne, down almost 60 percent since last year.
Aluminum prices have fallen nearly 30 percent over the past year.
And yet, despite the dreary picture, deep value investors like Baupost and Elliott recently acquired large chunks of Alcoa. Why? Because they are confident that the this latest demand for a government bailout will ultimately be greeted with an affirmative shake of the head by Xi Jinping. After all, the alternative - fair price discovery - is just too gruesome for any central-planner to even contemplate.
