Thursday, April 16, 2009

China Goes to Copper Currency Standard

Okay, that headline has not been endorsed by China's Politburo Standing Committee of the Communist Party of China, but our old pal Ambrose Evans-Pritchard makes a connection in a sharp bit of analysis at our last link.
On Monday I had a comment at MarketBeat:

Hey! Where’s the copper quote?
I know the CJR was writing about completely different topic with “Journal Walks the Plank with Commodity News” but I could use it here. You guys were pointing out to your readers an investment class that:
a) was moving and
b) probably more importantly, has some predictive value for the economy.
Here’s the CJR link, they’re kinda rough on Rupert:

Tuesday the anonymous toilers, electron stained wretches known only as MarketBeat Staff obliged with some factoids:

Comex copper for April delivery gained 8.85 cents per pound, or 4.18% to $2.2035.

  • Up five of the past six sessions.
  • Highest settle since October 15, 2008.
  • Up 19.82% so far in April.

Today, nada, so I'll fill the void. I am a bit concerned with all the play the red metal is getting among the punditocracy, here's a sampling. First up, Reuters via MineWeb:

Lower than expected Chinese growth dents copper price

Supply worries for metals led to price falls following lower than expected Chinese growth figures and a further deterioration in US new housing starts.

Slower-than-expected economic growth in China and a sharp deterioration in new home construction in the United States pulled the price of copper down on Thursday, but falling inventories slowed the rate of decline.

Copper for three months delivery MCU3 on the London Metal Exchange closed at $4,729 a tonne, down $90 from Wednesday's close.

China's economy grew at its slowest pace on record in the first quarter -- 6.1 percent compared with forecasts of 6.3 percent and averages around 10 percent in previous years -- prompting investors to take profits.

For a graphic, click on: (here)

"China's buying in metals is not directly related to domestic consumption," said Mo Ahmadzadeh, president of Mitsui Bussan Commodities. "The reaction to the GDP is correct because the longer-term prognosis is not beneficial for metals."

The metal, used in power and construction, lost further ground after the U.S. Commerce Department said groundbreaking on new homes dropped 10.8 percent to a seasonally adjusted annual rate of 510,000 units....

And yesterday, also from Reuters:

US copper renews advance on huge inventory decline

From ZeroHedge, some skepticism:

The false Chinese driven rally in copper

Much has been made about the Chinese connection with regards to copper demand since our last piece on the subject. This piece indicates that Chinese are gearing up for a manufacturing and construction rebound as supplies fall, prices rise, and Chinese indicators are showing bullish signs that are increasingly rare - being first order positiver rather than second order. However, we don't see this as a continuing trend and have to stick with the fundamentals that we highlighted in the previous post....MORE
A really bad idea from the Financial Post:

Switch from base metals to precious metals

In a dramatic shift from the fall, the base metals have greatly outperformed the precious metals in recent weeks. Copper in particular is up more than 50% from the bottom. But can it really last? Genuity Capital Markets analysts Tony Lesiak, Nawojka Wachowiak and Michael Gray don't think so.

"We believe a sustained upward momentum is base metals is unlikely to persist until there is tangible evidence of a global synchronized recovery, and believe that investors should take some profits in the current rally," they wrote in a note to clients.

Their outlook for gold is a bit better, as they point out that U.S. dollar weakness, safe-haven buying and negative real interest rates all bode well for bullion.

All the same, they have reduced their targets on gold companies and increased them for base metal companies based on the recent shift in prices....MORE

Finally an almost cheerful appearance from our terminally depressed friend at the Telegraph:

A 'Copper Standard' for the world's currency system?
Hard money enthusiasts have long watched for signs that China is switching its foreign reserves from US Treasury bonds into gold bullion. They may have been eyeing the wrong metal.

China's State Reserves Bureau (SRB) has instead been buying copper and other industrial metals over recent months on a scale that appears to go beyond the usual rebuilding of stocks for commercial reasons.

Nobu Su, head of Taiwan's TMT group, which ships commodities to China, said Beijing is trying to extricate itself from dollar dependency as fast as it can.

"China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years."

"The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources," he said.

The SRB has also been accumulating aluminium, zinc, nickel, and rarer metals such as titanium, indium (thin-film technology), rhodium (catalytic converters) and praseodymium (glass).

While it makes sense for China to take advantage of last year's commodity crash to restock cheaply, there is clearly more behind the move. "They are definitely buying metals to diversify out of US Treasuries and dollar holdings," said Jim Lennon, head of commodities at Macquarie Bank.

John Reade, metals chief at UBS, said Beijing may have a made strategic decision to stockpile metal as an alternative to foreign bonds. "We're very surprised by Chinese demand. They are buying much more copper than they will need this year. If this is strategic, there may be no effective limit on the purchases as China's pockets are deep.">>>>MUCH MORE