Monday, July 12, 2021

Round II: "China to sell more metals from reserves to ensure stable prices"

The first round of sales sort of fizzled, reminding us that it is not an easy task to manipulate prices.

The three distinct phases of what the Chinese did last time were:

1) Make the decision to sell the metals and experience front-running from some of the comrades at the table

2) Announce the plan to sell some inventory to test how much effect jawboning has

3) Release the metal onto the market

The problem the Chinese had in round I was that prices had already come down fast off the May 10 spike high when they made the announcement so that by the time the metal was put on the market participants were seeing it as a bargain compared to recent prices and absorbed the selling. We did get down to $4.08 but the action that morning looked more like someone getting liquidated by a margin clerk than a bunch of cathodes being offered down.

In some ways what the Chinese are trying to do is similar to a central bank trying to defend its currency: you have a limited amount of ammunition and can't just throw it into the market willy-nilly or you will run out. Just ask Malaysia and the BoE. All the central banks can do is attempt to guide the action that is unfolding. If they can catch the inflection points, the bankers get a magnified effect from their finite resources of foreign exchange. But it is so tricky: too early you waste your reserves, too late and the other side says thank-you for the supply. Just right and at best you amplify and accelerate where the market was going to go anyway. See also Warren Buffet's 1988 letter to the shareholders of Berkshire Hathaway for the denouement of most central bank forex campaigns: "He lied like a Finance Minister on the eve of a devaluation."*

That's enough intro, here's Bloomberg via Creamer's Mining Weekly, July 7:

China, the world’s top commodities consumer, pledged to release more base metals from its state reserves after completing a first batch of sales in its latest effort to rein in surging raw material costs.

More sales will be arranged in the near term to ensure market stability, the National Food and Strategic Reserves Administration said in a statement on its website Wednesday.

The first release of metals in over a decade included 20 000 t of copper, 30 000 t of zinc and 50 000 t of aluminum and was concluded via a public auction conducted on Monday. The reserves agency didn’t reveal the prices at which the metals were sold....

....MORE

I will be going into the Monday morning meeting and for the eighth or ninth week in a row will be asked "Should we buy copper" and for the eighth or ninth week in a row answer "Not yet" while thinking to myself "I'd really like to own some copper."

Not really sure what to make of the recent action on the chart, it looks like a scythe (concave) or a scimitar (convex):


FinViz

I hope someone isn't about to get their head handed to them. $4.2980 last down 0.0475.

*The 1988 Berkshire-Hathaway Chairman's letter, one of my personal favorites (it has the cocoa bean arbitrage story), right up there with the '84 and '85 vintages.