China sees Copper as the comeback strategy to its deflating economy – Part 2

Beijing racked up the outsized surplus because imports plummeted in January.  They were off 15.3% year-to-year and 22.4% month-to-month.  The size of these declines especially surprised China watchers.

The official Xinhua News Agency said trade “slumped” in January.  Obviously, the early Lunar New Year had some adverse effect on the numbers, and analysts are continuing to argue over the primary cause, but it is indisputable that the big trade surplus comes at the wrong moment for Xi Jinping.  China’s vice president, expected to be named the country’s supreme leader this fall, will visit Washington, D.C. on Tuesday.  The Obama administration, not surprisingly, is expected to put trade issues at the top of the list of matters to raise with Mr. Xi.

Those discussions would be more troublesome for Xi if it were not for China’s large copper purchases, because then its trade surplus would have been even more off-the-charts.  And so it’s no surprise that, at the moment, Chinese enterprises are on buying sprees for other commodities, especially crude oil.

So what does Beijing’s politically motivated copper purchases mean for future demand?  On the one hand, they suggest that Chinese enterprises will continue buying the metal to dress up trade numbers in succeeding months.  At some point, however, Beijing will put an end to the years of stockpiling.  My guess is that will happen in the middle of this year, perhaps early fall.

Why?  First, by then the slowdown in the economy will become evident, and stockpiling will no longer be able to mask the fact that imports, a proxy for domestic consumption and growth, are tumbling.  Second, Chinese enterprises will run out of money to buy unneeded metal.  Soon, China, which accounts for about 40% of global demand for copper, will not be able to support world prices by adding to its hoard.

“Underestimating China is the last thing any copper market participant should ever do,” writes the Wall Street Journal’s Andrea Hotter.  That was certainly true in October when she wrote this, but now, with a troubling falloff in growth at home and severe problems in China’s largest export markets, it looks like the real risks, come summer, will be on the long side of the copper market.

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Posted by Usman Khalid on Feb 13 2012. Filed under Business. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.