The Rising Influence of Rising Affluence

[DewDiligence]

Ben and Beijing Corrode Metal Markets

http://online.wsj.com/article/SB10001424053111903791504576588670971094728.html

›SEPTEMBER 23, 2011, 11:53 A.M. ET
By LIAM DENNING

Remember supply and demand? The quaint notion that these two set metals prices has been battered by Ben Bernanke and Beijing. Volatile markets, such as this week's, are the result.

Inventories in metal exchange warehouses are watched closely. In theory, when they rise, excess supply is building, pushing metals prices down, and vice-versa. Comparing the ratio of inventories with demand gives a better idea of how tight physical markets are. This isn't perfect—the ratio is a current indicator while prices look forward—but generally works well. From 2000 to the second quarter of 2011, quarterly price movements for aluminum, nickel, tin and zinc were inversely correlated with stock ratio moves by 50% or more.

But the relationship has faltered. Lead and zinc prices and stocks-to-consumption ratios have marched upwards together for much of the past three years. Aluminum prices this year have tested heights not seen since 2008, despite the stocks covering roughly eight weeks of demand compared to four back then.

Two relative newcomers have muscled in: the Federal Reserve and China. Low interest rates make it cheap to store metal and lock in price gains by selling futures. Analysts estimate the majority of exchange stocks of aluminum, for example, are tied up in such financing deals. So only a fraction of the approximately seven million metric tons is available to meet real demand. Such hoarding supports prices.

Then there's China. Since 2005, its appetite for copper, aluminum, lead, nickel and zinc has gone from 23% of global consumption to 42% [LMAO—this explains where the Seeking Alpha imbecile in #msg-67380399 got his unintelligible opening paragraph], according to Barclays Capital. Disclosure has not kept up, however, and tracking how much metal is actually being used in China is something of an art form.

Take copper. China's net imports of refined copper fell 36% year-over-year in the first seven months of 2011, according to Royal Bank of Scotland. Yet copper prices held up remarkably well during that time. Why? Many deduced that China was utilizing unreported stockpiles, meaning consumption remained healthy despite falling imports.

Given the lack of clarity, that view may be correct. But while both RBS and Barclays foresee major copper restocking in China, Societe Generale, looking at the same data and estimates, doesn't. It reckons Japan's disaster distorted Asian copper flows and that Chinese buyers have been recycling more scrap copper and buying metal when prices dip rather than restocking wholesale.

In addition, some local Chinese commodities traders this year have been using metal as collateral to obtain loans for other uses as Beijing tightens credit. That boosts copper imports, but isn't real demand.

For metals investors, pinning down metals prices increasingly involves trying to both decipher China and get inside Mr. Bernanke's head. The jury's out on which is more difficult, but it is an unenviable task either way.‹