Thursday, April 16, 2009

The false Chinese driven rally in copper

Much has been made about the Chinese connection with regards to copper demand since our last piece on the subject. This piece indicates that Chinese are gearing up for a manufacturing and construction rebound as supplies fall, prices rise, and Chinese indicators are showing bullish signs that are increasingly rare - being first order positive rather than second order. However, we don't see this as a continuing trend and have to stick with the fundamentals that we highlighted in the previous post.

The biggest addition to the discussion has to be a serious consideration of how accurate the officially reported China numbers are. While major economic numbers are usually reported with a straight face by the popular media (TV, radio, blogs, etc.) there typically are a number of mental modifiers and gymnastics that we have to apply in order to get to reality. For example, the NAR and NAHB (National Association of Realtors/Home Builders) regularly release numbers that are usually greeted with poorly hidden snickers, especially highlighted in recent times given the real estate market and the positive picture that they attempt to paint. The universal discount factor is always about assessing the releasing body's capacity for underlying motive vs. shame/guilt/outside pressures, etc. On this dimension, we have very little confidence that Chinese manufacturing and GDP numbers are anywhere close to reflecting reality.

As reflected in this Fortune piece, the external view of the US economy seems to be a highlight that capitalism is a failed model. When times are good, capitalism is a tough enough sell but when the system is down for the count the discussion shifts from a philosophical to a political arena. In that context, for a country like China, we have to seriously doubt the veracity of their numbers and the conclusions that can be drawn thereof. As we have mentioned previously, the best way to assess China is in a (1 - rest of world) model and based on that picture, and the highly export-driven nature of the Chinese economy we have to believe that copper is likely to fall once the unsustainable reserve buying dries up and the current market insanity subsides. Of course, we are not as well-versed in the geopolitics of the area but it certainly is an area which we will do more research on and post our thoughts over the next few weeks.

If anyone has good research on the subject, send it over:
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