Summary
As the world's largest consumer/ user of commodities, China influences pricing. Chinese traders are savvy and good at timing markets: buy low. Economic growth is stronger than most western 'experts' estimate. Therefore, stock piling of commodities appears to be a rational response to a collapse in prices since mid 2008 and expectations of economic growth for the coming quarters.
Analysis
After Deng Xiaoping became the de facto leader of China in 1978, the country slowly turned away from centrally controlled prices towards regionally managed pricing.
Currently, provinces （省）have a large role in determining when and from where they will purchase commodities on the international market.
According to Mr. Roubini "In the short term there has been a massive stockpiling of commodities by China, my concern is that China might have accumulated an inventory of commodities that is probably excessive to the growth of their own economy."
If Mr. Roubini is right and China has been stockpiling commodities, prices should be back to their mid-2008 levels. Looking at most prices, this is not the case.
Price change from the peak in mid- 2008
- crude oil -50%
- copper -32%
- platinum -40%
- soybeans -27%
- corn -49%
- CRB Index -43% Tracks the price of 19 commodities
source: Bloomberg, as of Aug. 4, 2009
And the list goes on. As the world's largest importer/ user of most commodities, China influences pricing. Chinese traders, one should remember, have been around longer than western trading firms. Hence they have developed a very keen sense of 'timing' their purchases, meaning they buy when prices are low and stay away when prices are deemed too high. As prices have dropped, China has started re-building inventories in expectations of a pick-up in demand.
China's economic resilience is obvious when we look at recent data on industrial production and the housing sector. The economy grew at almost 8% year over year in the second quarter of 2009, which equates to 13% quarter over quarter. Housing construction is rising rapidly, driving demand for copper, iron ore etc... Hence. Mr. Roubini's statement that "inventory of commodities is probably excessive to the growth in the economy" appears blatantly wrong.
To conclude, note the interesting buzz in Shanghai recently about the fact that in the Chinese metropolis it is now 'legal' to have a second child. Demand for commodities should follow !
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
