- by New Deal democrat
Back in 2008, I wrote an article called Hoarding in Plain Sight, making the argument that the tightness in oil supplies was crucially augmented by the decision of the Bush Administration to double the amount of Oil secreted in the Strategic Reserve, at the same time as other countries such as China also decided to start their own such storage facilities.
I suspect an opposite trend is in play now. After all, very few analysts are taking the position that China's economy is actually contracting, rather than just growing at a lower rate. If it's still growing, why wouldn't it be using even more commodities, increasing global demand? A change in stockpiling behavior is an answer that fits the data.
Let me give an example. Suppose I am a user of commodity Q. In Year 1 I made use of 1 million tons of Q, *and* stockpile another 250,000 tons. In Year 2, with my economy growing, I make use of 1.05 million tons of Q, but I cut back on my stockpiling to 100,000 tons.
What happens to the "end demand" for Q? It falls. In Year 1, I demanded 1,25 million tons of Q. In year 2, I demanded 1.15 million tons of Q -- a decline of 100,000 tons.
Something like this has happened to the world economy in the last few years. From 2009 through 2013, China wasn't just growing strongly, it was stockpiling all sorts of commodities. Here are some examples:
When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.....China's refined copper imports have surged over 70 percent so far this year to 1.1 million metric tons, while demand from Chinese manufacturers was forecast to rise by up to 7 percent. Meanwhile, iron ore shipments have risen 6 percent, with traders reckoning that local demand growth is much lower.
If you are looking for an example of China's economic slowdown, visit the country's biggest coal port.The huge stockpiles of coal are growing ever higher as factories and power plants cut back.Fuel
CHINA, the world's largest coal producer and consumer, plans to build stockpiles of the fuel in the eastern province of Shandong to ensure supplies and help stabilise prices, the nation's top economic planner says.The province would complete the construction of four to six coal stockpile bases within the next three to five years, the National Development and Reform Commission said.The bases would each have a capacity to store more than 20 million tonnes of coal.
Majo r Chinese aluminium smelters met last Thursday in the city of Kunming, Yunnan Province, to agree on how to save the industry.While base metal prices all tumbled in the past year – with copper dropping 26% and nickel 40%, aluminium’s 20% decline means the industry is being hit hard by losses, whereas copper prices are still much higher than the cost of production. At the meeting, the Chinese smelters discussed plans for supply-side reform, production cuts and stockpiling, according to market participants. .... Rumours about stockpiling have been circulating widely in the market, with some saying that 2 million tonnes of aluminium will be stockpiled this time. According to the market talk, major aluminium producers, as well as some large-scale state-owned trading...
China and India [ ] from 2008 to 2013 accounted for 98% of the increase in world coal trade. In the rest of the world, exports and imports of the commodity declined over the same period.
The Chinese economy is opaque. I do not know whether it actually has declined, or slowed down, or simply cut back on stockpiling. But to go back to the example I gave at the beginning of this article, "end demand," which includes both use *and* stockpiling, almost certainly declined.
This doesn't simply mean that suppliers now had to compete for reduced demand. Because of the vast increase in Asian, primarily Chinese, demand, increased supply was also called forth. The combination of increased supply and decreased end demand is a recipe for a commodity crash.
And all commodities, not just oil, crashed. Here for example is the 5 year chart of the Bloomberg Industrial Metals Index:
That not just oil, but all commodities, crashed, pretty much in unison, is strong evidence that the causation went from weakened final demand to a decline in commodity prices, not the other way around.
The aforesaid is all speculation. But a slowdown in Chinese stockpiling, if true, is a good explanation for why commodities are crashing in the face of a still-growing Chinese economy
