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Commodity Stockpiles A Risky Bet

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By John Richardson on 13-Apr-2010


By John Richardson

Inventories of copper, aluminium, lead and nickel have risen as prices for all these commodities have also surged, says this article in The Economist.


BasemetalsEconomistChartApril2010.bmpSource of graph: The Economists


Copper stocks total half a million tonnes in metals-exchanges warehouses in what HSBC analyst Andrew Keen describes as a market that’s departed from fundamentals.

The reason behind high stocks and rising prices is the willingness of traders to take positions in the belief that demand for these commodities will get even better next year.

And surprise, surprise, a lot of these hopes rest on China’s economy continuing to expand at or at least very close to the rates we saw in 2009 and in Q1 2010.

But pointers to significant further economic tightening in China are emerging every few days.

Last week, for example, the People’s Bank of China issued three-year bills for the first time in about three years in order to reduce liquidity. Financial analysts told ICIS news that Beijing was becoming more creative as it attempted to keep a lid on inflation short of interest-rate rises.

And last week also, there were reports quoting unidentified sources that Shanghai is considering a property tax in order to clamp down on investment properties. The source of the original news story was Shanghai Securities News, affiliated to the state-owned Xinhua News Agency.

This suggests the government is at least thinking about such a tax, and maybe is using the news stories to sound-out market and public reaction.

A slowdown in China’s overall growth would obviously mean that demand for metals would be less than is being anticipated, leading to a sudden unwinding of stockpiles.

If interest rates globally start to increase – a possibility as governments ease back on economic stimulus – this could give metals traders another reason to develop cold feet.

As the pricing of all commodities are so heavily interlinked these days, crude, chemicals and plastics pricing could also head south.

What’s interesting and needs more research by this blog are the more direct links between trading in chemicals and plastics and other commodities, such as metals, which seems to be common practice in China.

Parallel trading contributed to a sharp rise in China’s polyethylene (PE) stocks in March, which we talked about yesterday.