The mining newspaper for Alaska and Canada's North
The mining newspaper for Alaska and Canada's North
China stockpiles record tons of copper and zinc during its slowest GDP growth on record, causing analysts to speculate
China has been importing copper and zinc at a record-setting pace since the beginning of 2009. This unprecedented level of buying comes at a time when the Far East country is experiencing the slowest growth in a decade, causing analysts to speculate on what is driving the country's stockpiling of these base metals.
The good news for the mining industry is that China's hunger for copper and zinc has, at least for the short term, caused healthy gains in the prices of these metals.
Commodities watchers expected copper prices to languish around US$1.50 a pound in the short term, increase to about $1.75 a pound in the second half of 2009 and not return to their former trading highs until sometime in 2010. Zinc is also outperforming experts' predictions. The consensus was that zinc would average about US52 cents a pound in 2009 before climbing to about US65 cents next year.
Both metals rocketed past analysts' short term predictions and did not stop until they exceeded levels forecast for next year.
Copper - which freefell from about US$4 a pound in June of 2008 to around $1.30 a pound by year's end - rebounded through the US$2 a pound mark during April 9 trading, reaching $2.20 the following week.
Likewise, zinc - which dropped from its all-time high trading price of more than US$2 in December 2006 to a low of about US47 cents a pound in December - has recovered by more than 40 percent, hitting US68 cents on April 16.
Because of the importance of base metals to construction and manufacturing activities, their prices have a tendency to foreshadow other economic activity, causing forecasters to use these commodities as leading indicators of global economic health.
Tarnished bellwether
The recent surge in copper and zinc prices may not be as much a bellwether of a healthier-than-expected economy as an indicator of China's grasp of capitalism. The developing nation has been replenishing its stockpiles by buying up large quantities of both copper and zinc.
A recent report from China's customs agency reveals that the country imported 89,703 metric tons of zinc during the first two months of 2009, an increase of 633 percent over the same period last year. Industry sources estimate the country imported an additional 100,000 metric tons in March.
Similarly, the customs agency reported that China's copper imports for the first two months of this year rose to 451,438 metric tons, a 71 percent increase over a year ago. The Far East country reported an additional 374,957 metric tons of red metal imports in March.
While China imports record amounts of the metals, most of the world remains in the grip of a recession that is not expected to let up until the latter half of this year, leaving experts to conclude that the recent price gains are not sustainable when China stops buying.
Though analysts predict a contraction in zinc and copper prices, they do not expect that they will reach the lows of late 2008.
China banking on Bancor?
While China has been buying up the metals at an unprecedented level, the country's gross domestic product grew by only 6.1 percent in the first quarter of 2009, the slowest growth on record. The country's GDP depends largely on exports which are expected to remain slow as long as the countries that consume its products remain in recession.
Economists have been batting around ideas about the reasons for the surge in Chinese metal buying. The most widely accepted theory is that the country is simply buying base metals at yard sale prices in anticipation of its domestic needs when the US$585 billion stimulus legislation kicks in and global demand for goods made in China increases as the world economy recovers.
Although this reasoning is the most popular, it may not tell the whole story and is certainly not the most interesting argument.
An article by Telegraph International Business Editor Ambrose Evans-Pritchard suggests that China is moving its foreign reserves from U.S. Treasury bonds into metals, especially copper.
While money watchers have anticipated that China would diversify its reserves, most anticipated a move to the more traditional metal, gold. Evidence suggests that the country may be shifting its money into more practical metals.
In his article Evans-Pritchard points to a speech by China's top banker which may provide insight into why the country is purchasing more metals than it is expected to need during the global slowdown.
During a March 23 speech, titled "Reform the International Monetary System," the governor of the People's Bank of China, Zhou Xiaochuan, suggested the global monetary system should be based on commodity reserves.
The international monetary system should be, according to the governor of China's central bank, "anchored to a stable benchmark."
The banker does not suggest that an international reserve currency be tied to one metal, like the Gold Standard or the Silver Standard of days past, but to a group of commodities.
Zhou referred to Bancor - a commodities-based financial system introduced in the 1940s by John Maynard Keynes. In his speech the banker called the Bancor system farsighted and said it is unfortunate that the system was never accepted.
If China is listening to its top banker, it might explain why the country is stockpiling metals. If the country is anchoring its money to commodities then the country's buying spree may be far from over. By buying up metals at clearance sale prices, the Far Eastern country diversifies its foreign reserves and holds a stockpile of increasingly important metals that will be needed when consuming countries are once again ready to buy goods made in China.
Over his more than 16 years of covering mining and mineral exploration, Shane has become renowned for his ability to report on the sector in a way that is technically sound enough to inform industry insiders while being easy to understand by a wider audience.
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