Saturday, June 13, 2009

NYT: China's Commodity Buying Spree, Endless?

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We've spoken countless times of the influence of China on the commodity space the past few months; when China buys, prices tend to fly upward.
The ultimate question is after China stockpiles commodities, what's next? Especially if all their large export partners remain a shell of them former selves. While they can create domestic demand via massive stimulus for a short period, making this transition from export laden economy to internal consumption will take a long time [Jan 8, 2009: NYT - As Trade Slows, China Rethinks Its Growth Strategy] So after our sugar high, then where are we? Good question. [May 21, 2009: Credit Suisse Joins Others in Call: China's Recovery Stalling]

Via NY Times:
  • Strong buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable.
Remember each time China decides it wants to buy iron ore, the Baltic Dry Index surges and we're told this signals the world economy is coming back. Meanwhile railroad loads and truck loads are almost the lows of this entire recession.
  • At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.
  • Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.
  • China’s goals vary by commodity. Chinese companies have bought iron ore heavily on the spot market in anticipation of higher prices in annual contract talks now nearing completion. The Chinese government has been stockpiling oil and some metals for strategic reasons, and bought huge quantities of aluminum and canola to insulate domestic producers of these goods from falling global prices over the winter.
  • “There has been enormous stockpiling of all commodities” by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings, a big shipping line based here.
  • 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 right now is essentially an island onto itself... very little help from any of the major world economies of size and scale. Apparently they have been watching American movies because their situation right now is "build it and they will come".
  • In the latest sign of weak overseas demand, the Chinese government announced on Thursday morning that the country’s exports fell 26.4 percent in May from a year earlier. Imports were down 25.2 percent from a fairly weak level a year ago, as China’s overall trade surplus continued to narrow, to $13.39 billion.
Or it could be a lot more simple than that - with so many migrant workers who lost work as the global economy imploded, you want to have these people occupied doing something... anything. Much more favorable than having them agitating outside government buildings.

And why momentum traders keep pushing these dry bulk shipping stocks around as a "direct way to play global growth" there is a very dark outcome forming. (that said, it really doesn't matter to traders - stocks are 4 symbols on a computer screen to be bought and sold based on squiggly lines, fundamentals are for old guys in their 60s to worry about)
  • Richard S. Elman, the chief executive of the Noble Group, Asia’s largest diversified commodities trading company, bounced up from the conference table in his office here when asked about freight rates during an interview.... quickly punched up on one screen a list of daily charter rates for large bulk carrier freighters.
  • The list showed ship owners charging $58,000 a day now but just $24,000 a day for charters next year or in 2011 — an indication that there will be more ships than cargoes in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom. Pointing to the rates for the next two years, he said, “That’s the real market” for ships. (but that doesn't fit neatly into a 30 second sound bite for CNBC to parade about)
  • Mr. Elman voiced optimism about the future of the Chinese economy and of worldwide demand for commodities, but cautioned that for some commodities, “the futures prices have gone ahead” of the prices for physical delivery.
  • ........ China’s iron ore imports were 33 percent higher in April than a year earlier. Crude oil imports were up nearly 14 percent, aluminum oxide imports climbed 16 percent and refined copper imports jumped 148 percent. Imports of coal soared 168 percent as Chinese utilities bought more foreign coal while trying to negotiate better prices with domestic producers.
And the above is why all our "sign posts" about using commodities as a signal of recovery have been thrown out the window. Basically it tells us what the central command in China is buying nowadays.
  • Determining the percentage of each commodity being stockpiled is difficult, especially in China, where scant data are released. Assessing steel demand, in particular, has become a subject of almost obsessive interest among many shipping executives and economists as a barometer of emerging markets’ health and as an indicator of demand for things like iron ore and cars.
And that's what makes a market...
  • Some economists say they are bullish on commodities because they believe that the United States and European economies are on their way to recovery. “The commodity price rally is for real,” said Ajay Kapur, the chief global strategist at Mirae Asset, a big Korean financial firm. “I’m not expecting any huge correction from here.”
  • Other executives, particularly in shipping, are less optimistic, and see signs of a bubble in freight rates, and possibly commodities, that may repeat the sudden rise and fall of prices last year. “The past two weeks have been nuts and, rather than cheering this sudden comeback of the dry bulk market, I do have a considerable amount of concern that we are seeing the same bubble again,” Kenneth Koo, the chairman and chief executive of the Tai Chong Cheang Steamship Company, another big Hong Kong shipping line, wrote in an e-mail message. “And like that past bubble, it’s not going to sustain.”
[May 31, 2009: Stephen Roach on Asia - No Sail]
[May 27, 2009: How is China Spending Their Stimulus? ... and How Many Loans will go Bad?]

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