If world demand for a specific commodity was going down by 15-20%, wouldn’t you expect the price to fall? Well, that depends on how you define “demand”. If by demand, you mean the actual need for copper in various products, then yes, demand is falling. Except, we must now define demand as speculation, for this is exactly what China is doing: They are speculating on future demands for copper.
As the price of extraction grows, along with with worldwide population, the price of existing copper supplies will increase along with it. China is unsure about the long term value of fiat currencies, and has chosen to put some of its monetary resources into commodities. As a result, copper futures are showing strong price increases. They are approaching levels not seen since last September, when the bottom fell out of the commodities markets.
30 Day Copper is headed towards $2.50 a pound.
On a more interesting level of subterfuge, they seem to be using their stockpiles of USD to buy assets. This gets them out of the volatile USD, and into something that can be exchanged for the most stable currency, at the greatest possible profit. If nothing else, they get the added security of knowing they have the raw materials to keep their infrastructure projects growing.
What’s China’s real angle here? In an interview with Ambrose Pritchard of the London Telegraph, Nobu Su has this to say about China’s motivations:
“China has woken up. The West is a black hole with all this money being printed. The Chinese are buying raw materials because it is a much better way to use their $1.9 trillion of reserves. They get ten times the impact, and can cover their infrastructure for 50 years.”
“The next industrial revolution is going to be led by hybrid cars, and that needs copper. You can see the subtle way that China is moving into 30 or 40 countries with resources,” he said.
The question is, how long will they continue this practice? The answer is “Until all the US currency is gone”. It’s a smart, strategic move. Why? Because when inflation takes hold (and given the amount we have printed this past year, it most certainly will) they will be in a position to make a massive profit, and take hold of massively devalued assets like commercial real estate.
Also, while the Chinese aren’t particularly high on environmental reforms, the rest of the world is, and they have positioned themselves as a controller of the goods needed for the so-called “Green Revolution”. It’s quite brilliant.
So what does this mean for the OTR community? Will we see mines kick-starting operations anytime soon? If they do, then they have to hope China keeps buying. If they don’t, then supplies will dwindle, and the Chinese profit even more. Even now, there’s some brilliant guy poring over the economic models, and determining when the best time for profit is. My guess is, when the support level for copper hits $2.50 or thereabouts, we will see machinery being refitted for operations, and regular shifts will resume at the mines.
In the meantime, futures traders will continue to push the spot prices higher, and spot prices will continue to advance, even in the absence of present demand.
(Update: As with all issues, there is a counter-argument. Shanghai Scrap contests the London Telegraph report. They have a very convincing contrarian viewpoint.We think you will enjoy the information Mr. Minter puts forth.)
That’s all I have for now. We’ll continue to bring you the latest in news affecting the tire and mining communities.
Until then, I’ll be….
Signing off…
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