This story on Bloomberg, about stockpiling of base metals by Chinese farmers and housewives, highlights a type of speculation that observers in the West haven’t considered deeply. Since these were purchases by individuals, sometimes in the form of scrap, it’s hard to ascertain how significant a factor this activity has been. If nothing else, the expectation they will reduce holdings is a sign of a change in sentiment.
From Bloomberg hat tip reader Michael)::
Copper, nickel and other base metals stockpiled by speculative Chinese investors including pig farmers may be sold when “market sentiment turns,” said Scotia Capital Inc.
A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to buy copper and nickel for speculation, Liu Na, an analyst with Scotia Capital, wrote in a note dated Aug. 17,….
“These stockpiles are in ‘weak hands’ as speculators have no real use for base metals,” Liu wrote. “When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank’s money is involved.”…
China, the world’s largest metal consumer, uses around 5 million tons of copper and 400,000 tons of nickel a year. Shanghai exchange-monitored copper stockpiles expanded to 76,107 tons last week, the highest in two years.
“The scale of the speculative investment is hard to quantify, although some local observers put the number at some 200,000 tons for copper, and at 50,000 tons for nickel,” Scotia’s Liu wrote. “We regard these speculative behaviors as natural, and they will inevitably occur in a bull market, so we do not want to exaggerate the impact they have.”
Pig farmers in Guangzhou province were buying copper or nickel, Liu wrote, citing CCTV. Residents in Wenzhou city of Zhejiang province, “famously investment savvy,” are reportedly using bank loans to stockpile copper scrap, with one merchant saying he has stored 20,000 tons, Liu wrote.
Housewives in Wenzhou may have stockpiled metals as “they just have too much cash on hand,” Eramet’s Deng said…
Metal traders have reported incidents when “a rich man walked into our office and asked us what had been the lowest and highest prices of nickel,” Scotia’s Liu wrote. “After telling him those prices, he said the current price was low and he placed an order.”
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Copper and Pigs – Hmmm. Shades of Steve Keen's
"The roving cavaliers of credit". Farmer Maria and Plumber Joe
So one guy has 20,000 tons of scrap copper. Copper.org says that 1" copper pipe weighs about .839 pounds per foot. 20,000 tons = 40,000,000 pounds. 40,000,000 pounds /(.839 pounds/foot) = around 47,675,804 feet. Divide that by 5280 ft/mile and this one guy has the equivalent of over 9000 miles of scrap copper pipe.
I wonder if he smelts it right away to make it more manageable. Used copper pipe is unwieldy.
Jimmy Rodgers was on CNBC the other night and said that the smart way to invest in China is to invest in commodities. Guess these pig farmers must have been watching (or maybe Jimmy Rodgers was watching the pig farmers/investors).
I stockpile bacon.
Peru is dangerously over-exposed to copper exports. I'm closely watching both the LME #s as well as any developments in S. America.
This is probably more indicative of a credit bubble and easy money than a "bull market." Unless by bull market you mean "musical chairs."
Unfortunately, U.S. consumers and the shopping-network government do not know the importance of metals to the economy. The Chinese government is making pacts, alliances, and deals around the world to secure all kinds of mineral resources for their future. In contrast, the U.S. government is more concerned with profligate consumption and funding the wasteful "throw away" society than developing or securing supplies of metals and other raw materials essential to the economy.
"So today, the U.S. strategic stockpile is gone. It has been sold off. There is just about nothing left. The warehouses are empty. (Heck, the U.S. government even sold off many of the warehouses.) And maybe it seemed like a good idea at the time. Selling the stockpile raised a bit of cash for the federal coffers. But in the broad picture, selling off the stockpile was a strategic blunder for the U.S."
http://www.energyandoil.com/the-us-strategic-stockpile-is-gonenow-what
Cash for Clunkers is the poster child for the "throw away" society. The thousands of pounds of energy-intensive, highly-processed metals and other raw materials and advanced engineering equipment in cars is an enormous investment based on massive inputs of energy, mining, water, labor and materials. It makes no energy, environmental or economic sense to destroy the car engines and render the investment useless years before the end of their useful life. By disabling the engines, the car's use and value for spare parts is crippled.
"Cars taken out of circulation by Cash for Clunkers could end up landfilled instead of recycled, because the program rules make it hard for salvage companies to make money."
"Crushing the engine renders useless the most profitable part of a salvaged vehicle, worth up to 30 percent of a car’s overall value at the end of its life; and sending the cars to the compacter after six months significantly shrinks the window of opportunity to monetize parts from vehicles. Both rules are environmentally counterproductive, because they mandate the scrapping of parts that could have otherwise been reused to offset energy and raw materials required to produce new ones."
http://www.portfolio.com/business-news/portfolio/2009/08/19/cash-for-clunkers-creates-salvage-yard-glut/
Tom,
excellent pt – we can also draw a bigger analogy w/real estate inputs
20,000 tons of copper is a cube 41.5 feet on a side.
At current prices, it is over $100 million dollars of copper… which would put them somewhere between the 500th and 1000th richest person in China.
Everyone seems to think this is a bad thing. These are well to do with extra cash, who are already invested in things like realestate, currency and stocks. In china, commodities even in small amounts are very liquid due to the numerous small businesses and dealers that cater to them. Seems very sane to me.
I would not prejudge them as naive.