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| Daily Jurojin - Monday, June 15, 2009 |
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Monday, June 15, 2009 China's commodity bubbleWhat are the prospects that the recent commodity price snap back is for real as opposed to being a revival of the bubble that burst deafening investors in the process? With most investors clamoring to buy equities for fear of missing out after more than a 40% rebound for stocks, most are tempted to conclude that the global economy must, therefore be on the end.Phase I of the commodity rebound was ushered in by the Chinese government stimulus in October. The $585 billion plan to aid domestic businesses via government spending programs on infrastructure ushered in predictions of demand for heavy machinery along with a variety of aggregates and metals. The second phase arrived as a rising crescendo of voices raised concern over the double-jointed freak-show of a falling dollar and an explosive budget deficit. Phase II began as more investors around the world realized that the Chinese solution through stimulus use was being trumped by government packages around the world as they spent their way to recovery. Phase III began when the Chinese began to stockpile hard assets. Knowing that they couldn't readily dump their sizable holding of U.S. government bonds without causing a stink, not to mention sizeable losses, the Chinese let the cat out of the bag that they'd be buying the best antidote possible - physical commodities. The stockpiling thus began in April. This simple three phase, yet unwitting plot created the appearance of engines reigniting, which coincided with a slowdown in the pace of global contraction. How quickly things can turn. It doesn't seem like yesterday that we'd hear about crude oil tankers lurking off the Straits of Hormuz waiting for a dollar dip I the price of crude oil so they could fill up and be on their way. Before we knew it the Galveston storage facilities were jam packed and the tankers sat off the Texas coastline and gasoline prices were sinking. The New York Times recently reported that at least 90 large inbound freighters were sitting off Chinese ports laden with iron ore. However, the fact is that they face a wait of two-weeks on account of ever-rising stockpiles. Yet steel production, which is the end result of iron ore imports remains slow to recover in China and exports of finished products remain weak. Since April when China let its dollar-diversity program out-of-the-bag the nation has been busy stocking up on metals and grains. According to JPMorgan, iron ore imports were one-third higher than a year earlier. Crude oil imports were 14% higher while refined copper imports were up 148%. The Chinese rationale is helping fuel investor demand and is inflating the bubble as investors firmly believe they are in good company. But the reasons behind the buying are a little more circumspect when you dig deeper. Chinese companies faced with annual renegotiations on commodity contracts have tried to load the boat their favor by securing immediate spot-transactions leveraging their bargaining power. The government has been buying oils and metals to diversify its dollar holdings, but also bought plenty of various domestically produced goods to help insulate its domestic producers from falling prices. In all many are sensing that what looks like a healthy commodity price rebound on the surface might not be sustainable indefinitely. Prospects for various commodity sectors in Asia were recently shifted to a negative outlook by ratings agency, Moody's. They note that the recent rally has been fuelled by stockpiling. In order to sustain those price gains what's needed is a strong and sustained rebound in the economic fortunes of Europe, Asia and the U.S. They don't expect to be a factor until 2010 at the earliest. When you look at the cost to ship tones of ore by sea around the globe, you'd look at the Baltic Dry index as a good cue for what it costs. FYI, if you have $54,000 we can get you a sweet spot from Perth to Shanghai. Oh, did we mention that's per day? But according to forward prices, the freight cost is $24,000 out as far as 2011, which adds up to the fact that something tells us that the global commodity boom doesn't feel as sustainable all of a sudden as it once did. The Supreme Council of the Secret Order of Jurojin |
