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Monday, July 20, 2009

China is building strategic reserve in commodities

The earlier evidence was further confirmed by more data recently that China has been stockpiling copper and other commodities strategically. This is a smart move on Chinese side, but it shows the recovery in China was not strong as the commodity price would have indicated. Read this analytical piece from WSJ.

What is China going to do with all that copper? Move the futures markets, for one thing.

Bolstered by stockpiling, the country's imports of the red metal in the first half jumped 69% from year-earlier levels. Seizing upon last year's drop in prices, China's State Reserve Bureau now holds at least 235,000 metric tons of copper, nearly as much as the London Metal Exchange warehouses hold to back futures trading.

Arbitragers followed suit, after the SRB's buying helped push copper prices inside China well above those abroad. Deutsche Bank estimates factories and warehouses in the country hold as much as one million metric tons of copper in total -- equivalent to nearly a month's global consumption.

[copper]

Meanwhile, LME copper futures are up 63% since February. What next? The market's already proved its susceptibility to speculation about the SRB's next move. In June, reports the government had turned seller fueled a sharp price retreat.

A paucity of information doesn't help. An official from China's National Development and Reform Commission last month said stockpiling had ceased. But not everyone's convinced. After all, with copper still well below last year's peak of nearly $9,000 a metric ton, China might want to keep building its position.

Bulls also say investment in power-generation capacity, a recovering construction industry, and buoyant car sales may see China gobbling up its copper reserves. This is all causing a wide divergence in views for the second half of the year. Price targets range from $3,500 a metric ton, a 31% drop from current levels, to $7,000 a metric ton, a 37% rise. Even more than usual, the outcome will be in Beijing's hands.