CHINA: A Country Turned Speculator!!!!!

Sup-prime crisis started in 2007 affected housing sector first and later on spread to other sectors including banking, consumer durables, manufacturing etc. Hardest hit country was US, but growth of other developed nations was also butchered by the recession. Developing nations were hard hit from the recession with their growth rates realigned at much lower percentages than forecasted earlier.

China a major consuming nation adopted a different approach towards the issue of financial crisis. It started buying the major a large amount of metals in order to support the local smelters. This gave rise to speculative bets in the commodities market, especially Base metals.
According to Barclays Capital, China now consumes a quarter of the world's copper, compared with a tenth a decade ago. Last year, China alone accounted for a staggering 94 per cent of the global growth in demand for aluminium. It also now accounts for almost a tenth of global oil demand, compared with only 3 per cent 20 years ago. It is now the world's biggest oil consumer after the United States.

In the last few months China has bought huge amount of Copper for creating reserves. The theory behind the buying was that China wanted to reduce its dependence on the US treasuries. Moreover when the market recovered it will prove beneficial to have reserves of metals at low rates. This will not only help the huge construction demand in the country it will also ease the pain which local smelters have been experiencing.

Contrary view suggests that buying of Copper and other metals by China was dumped in the country’s warehouses. Therefore the real demand ahs not emerged even in China. US is already struggling from dismal housing start numbers week after week. So it is a bit early to predict that the rally in Base metals will last longer.

LME Copper Prices in the forwards market tested $ 4720 per tonne up 48% on 17th April 2009. These are 7 weeks high levels of Copper. Other metals also followed the tone with Nickel rising to $ 12550 per ton and Zinc and Lead crossing $ 1500 each to $ 1540 and $ 1509 respectively. The rise has been barely due to the fact that China has turned speculator and buying copper irrespective of the fact that the demand from the housing sector isn’t their as yet.

The move from China is no doubt pulling metals out of the socks, but what it has done in the process is to create a sense of surprise and volatility in the markets. The numbers speak for themselves and with the rise in the amount of consumption by China the volatility is about to happen. Most of the trades are done taking Chinese markets into perspective along with US and EURO Zone. Therefore the focus of the world has spread from a narrow approach of early 90’s to a wide perspective of current markets. The prices are expected to be driven by China hearsay’s and news in coming days as well.

Now the news of Chinese buying for assistance of smelters and the investment in metals to transfer presence from treasuries needs to be analyzed carefully. Another reason can be that arbitrage opportunities lured China to take advantage of the low prices and to sell at a higher price to earn huge profits at the cost of the world.