charting shorts, page-91

Interesting article on the behaviour of metals prices over the last 6 months and the involvement of China. Would suggest we've see a good old fashioned dead cat bounce.

I still think we might see a lift up to around $36 over the next few weeks, at which point BHP will be staring over an almighty cliff

How Beijing kicked an own goal on aluminiumJOHN GARNAUT
July 6, 2009
If "China Inc" were a person it would probably be Xiao Yaqing, the former president of Chinalco who is also an alternate member of the Communist Party's Central Committee.

Xiao twice mustered the resources of the Chinese state to buy into Rio Tinto and disrupt BHP Billiton's empire-building ambitions. For his efforts he was rewarded with a plum job as deputy secretary-general to the State Council.

But China Inc is less coherent, less sinister and far less effective than often imagined. Here is the background story of how Xiao kicked a home goal by persuading his superiors to accumulate "strategic" metals reserves.

In November, after commodities prices had collapsed, Xiao requested and received an urgent meeting with the Premier, Wen Jiabao, sources close to Chinalco say. Xiao told Wen that the whole aluminium industry was in crisis. Chinalco and every other big aluminum company was losing money, and hundreds of thousands of jobs would be lost if the state did not step in and soak up excess production.

Wen briefed the State Council, China's cabinet, and spoke in favour of a rescue plan. The State Council instructed the State Reserve Bureau to buy aluminium and other metals including copper, zinc, nickel, tin and titanium as part of a diversified metals industry rescue plan.

Steel was initially included in the list but later removed, as the metal takes up a lot of storage space and tends to rust.

Officials at the State Reserve Bureau and the institution in which it is housed, the National Development and Reform Commission, thought the Xiao Yaqing-Wen Jiabao policy was a mistake from the start. Nevertheless, the bureau duly bought 300,000 tonnes of aluminium in late December and another 290,000 tonnes in February.

Chalco, Chinalco's listed subsidiary, was the most obvious beneficiary. It accounts for a quarter of Chinese production but received nearly half of the stockpile orders.

Provincial governments followed the Reserve Bureau's lead, JP Morgan estimating they bought 880,000 tonnes of aluminium for stockpiling in the early months of this year. The corporate sector also became involved, competing to accumulate inventories as prices rose.

Together, they brought forward a large proportion of the country's expected total production this year, which is predicted to be about 12.5 million tonnes.

Xiong Weiping, who replaced Xiao as president of Chinalco and Chalco in February, has publicly lamented that the period of loss-making prices did not last long enough to push high-cost producers out of business.

A metals expert, Michael Komesaroff, said China had 6 million tonnes of installed but idled capacity ready to fire up if and when prices revived. The Chinese aluminium market remains hugely overcrowded, and prices will in effect be capped for years to come, to the long-term detriment of Chinalco.

In addition to postponing a much-needed shake-out of the industry, the problem with the policy was that there was no guarantee companies like Chalco that were contracted to supply the State Reserve Bureau did so from their own factories. Instead they bought from cheaper suppliers overseas and clipped the ticket on the way through.

The bureau's buying helped push the Shanghai aluminium price higher than the London price, inviting a flood of imports into China.

Komesaroff said: "For a few short months this year China flipped from being the world's biggest aluminium exporter to the biggest importer, which held a floor under prices when they might otherwise have collapsed."

Some of the benefit went to China's aluminium producers. Chinalco and Chalco posted smaller losses than they would have otherwise. But it was a particularly expensive way to achieve that goal.

Mostly, it amounted to an effective transfer of wealth from Beijing to international producers of bauxite, alumina and aluminium, of which Rio Tinto is the world's largest.

Ten days ago an enterprising journalist from the magazine Caijing gatecrashed a meeting between the National Development and Reform Commission and various bankers.

The official hosting the meeting was Yu Dongming, director of the commission's Office of Metallurgy and Construction Materials, who works closely with the State Reserve Bureau and Chinese metals producers.

Yu candidly told the gathering: "The starting point for this policy was to ease the cash flow problem for manufacturers but, unexpectedly, agents became the biggest beneficiaries and manufacturers did not directly benefit … Under such circumstances I don't think the state government will continue stockpiling."

Note that the strategic rationale was to prop up producers, not to diversify foreign exchange reserves or make money by buying low and selling high.

Yu's statement was taken to signal the end of China's official stockpiling of high-value metals like aluminium, copper and zinc. My own guess is that it also coincides with the peak in Chinese import demand for bulk commodities like iron ore and coal. This means Australian mining exports to China are likely to dip over the second half of this year, although there are early signs that Japan and South Korea will recover just in time to take up the slack.

For Australia the great benefit of China's official buying was that it took place exactly when Australian mining companies needed it most. Xiao Yaqing played no small part in sparking the resources revival that emboldened Rio Tinto to walk away from the $US19.5 billion investment lifeline that he had worked so hard to put in place.