Friday, January 9, 2009

Commodities in focus -- Copper rises in London trading as China begins to stockpile raw materials

The commodity sector has been hit hard by the global economic crisis, especially in terms of the speed of its decline. For much of 2008 as other equities faltered, shares of commodity and energy stocks seemed immune, many times leading the major US indices into the green despite poor performance in other sectors.

When markets began to tank between September – November this all changed. Year to date (2008), oil is down around 60%, copper 50%, natural gas 20%, etc. As commodities plummeted miners profits shrank, exploration slowed, new mining projects became unfeasible in light of depressed prices and speculators who had been relying on energy and raw materials as a safe investment or inflation hedge withdrew their money.

If the stimulus packages being enacted by governments around the world successfully help to re-invigorate the global financial system and we see a recovery in confidence and economic activity the recession may end sooner than expected. If this happens commodity demand will once again explode, especially considering how so many producers and explorers have scaled back their operations.

China is not oblivious to this. Much like China's logic behind securing resources in Africa to avoid supply disruptions, China is now concerned about supply disruptions that may occur if demand picks up.

Bloomberg and Reuters reported this morning that China's Reserve Bureau, the country's stockpiling agency, is buying aluminum. Analysts seem to think (and I agree in this situation) that if they are buying up aluminum at cheap prices, they will do the same for other metals.

“Aluminum inventory in warehouses monitored by the Shanghai Futures Exchange declined 18% in the past week, the largest decline since April 2007, figures from the exchange today showed. China’s Ministry of Land and Resources said two days ago the country would build emergency stockpiles of copper and other items to guard against potential supply disruptions.”

(click here to access the full article from Bloomberg, republished by the Mining Journal)

China is smart to do this, with the country's massive foreign reserves and depressed commodity prices it makes sense for them to stockpile the resources they need to ensure their development. China is worried about its slowing economy because of the potential for political unrest in bad economic times.

Considering the fact China continued to purchase commodities when they where selling at their recent historical highs, it must feel like shopping at a giant fire sale for the Chinese who can now scoop up a huge stockpile of raw materials and energy for depressed prices.