A Commodity Warning Sign

Commodity bulls take note: China has stopped stockpiling nonferrous metals. According to Yu Dongming of China’s National Development and Reform Commission, over the last quarter, China has accumulated 235,000 tons of copper, 590,000 tons of aluminum, 159,000 tons of zinc and 5,000 tons of titanium. Because of this commodity grab, “nonferrous metals prices have rebounded,” he said. “Given these circumstances, we don’t expect the state will continue to build its reserves.”

“I don’t know about the stockpile arguments,” Chris Mayer assures. “Seems too neat. There was a lot of stockpiling going on in molybdenum on the way up… and now the stockpiling is declining and the price is recovering.

“If all it took to forecast commodity prices was to peek through to stockpiling, then commodity investing would be easy. The real world is messier… Stockpiling happens when prices rise and when they fall. I don’t know how good a predictor stockpiling is. Count me deeply skeptical.

“The more relevant question is not so much about stockpiling, but how daily production has been taken out of the market.”

“You also want to consider what Bernanke and Geithner will do to debase the dollar in the coming years,” adds Dan Amoss. “If you’re a foreign creditor facing with this constant portfolio decision, which has higher marginal utility?:

1) US$2.32

or

2) 1 pound of copper

“The Chinese will probably go with No. 2, especially because copper (and oil, and iron ore) can be stored and used in infrastructure projects to keep the population somewhat placated with infrastructure jobs. Interestingly, we could actually see stockpiling/U.S. paper divestment accelerate if Chinese exporters remain in recession (which is likely).

“I think they’ll be in the market to stockpile on every dip and diversify out of U.S. paper as discretely as possible.”