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TOPIC: China and Commodities

China and Commodities 4 months 3 weeks ago #1

  • Michael Gebhart
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I'm wondering what you guys think about China and how they will affect commodities prices near term.

Kyle Bass has been commenting recently on the Chinese banking meltdown coming soon and the U.S. has been imposing stiff tariffs on certain types of Chinese steel such as corrosive resistant steel and cold-rolled steel. The last time U.S. steel tariffs were imposed in 2002-3 they negatively impacted the manufacturing sector. To me it seems these problems could trigger a new low for commodities and cause disruption in the natural resource sector causing what Rick Rule refers to as supply destruction leading to much higher prices in the future.


Mike
Last Edit: 4 months 3 weeks ago by Michael Gebhart.
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China and Commodities 4 months 2 weeks ago #2

  • sck
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I travelled to China, Xian last month for vacation. The 2 persons I spoke to are relatives of my wife and some findings as below:

The pace of development at the city is at a tremendous speed. 2 years ago when I went there, its international airport will have passengers question "huh.. this is an international airport??". (no shops for shopping, toilets will leave passenger thinking "maybe I should control till I reach the hotel"). 2 years later (now), its has hugely improved with retail shops, toilets with a level of cleanliness, better queue system etc.

At the city itself, i see many high-rise homes currently being under construction and it has expanded outwards of the city. When asked, i was informed that the city has a population of about 8 million and the target is to hit 10 million in the year 2020. When further probed, there are many empty houses in the city. Due to the relaxation of rules for owing more than 1 property, there are people who purchase 2 or more properties now. However, what I find strange is that for some developments, its prices dropped once the homes are completed. I was thinking "why on earth are they buying then, if some completed homes sell less than before they start construction?". What i feel is that they have too much optimism on the ability of the local government to maintain the prices and secondly, he mentioned that "the local government derived their revenue from the sale of land, thus they will not let prices dropped too much."

One of the relatives played the stock market and he disclose that the government has let the people down by encouraging them to get involved with equities. Though not surprising but the frankness he showed, displayed to me that the government might present an image that is different from the ground. If more mis-steps by the government should followed, I am not sure if they can still maintain the social harmony that they want.

Lastly, it was agreed that new graduates have a harder time to find jobs now, and one of the relatives (who is currently working) confirm that he felt the economy is slowing down. He purchase a volkswagen tiguan in 2015 January at about 260,000 RMB and last month, it is selling 30,000 - 40,000 RMB lower. There are definitely more cars on the road than when I last went there 2 years ago.

Disclaimer: I only spoke to 2 person and thus, will definitely might not be reflective of the whole. Secondly, it is only one of the many cities and thus, other cities might be in a better / worse shape.
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China and Commodities 4 months 2 weeks ago #3

  • LBL
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Michael Gebhart wrote:
I'm wondering what you guys think about China and how they will affect commodities prices near term.

Kyle Bass has been commenting recently on the Chinese banking meltdown coming soon and the U.S. has been imposing stiff tariffs on certain types of Chinese steel such as corrosive resistant steel and cold-rolled steel. The last time U.S. steel tariffs were imposed in 2002-3 they negatively impacted the manufacturing sector. To me it seems these problems could trigger a new low for commodities and cause disruption in the natural resource sector causing what Rick Rule refers to as supply destruction leading to much higher prices in the future.

Mike

Since I live in the country, I have the option to accumulate metals off to the side of the driveway. The pile of metals is basically garbage, but I have the option of selling it. Getting 10 cents a pound for a pile of tin cans versus paying to throw away 'garbage' - that was the initial incentive.

(Also the pile of metals has a security function - the pile of copper wire is located where it is, for a reason.)

One thing I notice is that the surplus metal markets behave sort of like the HUI. Prices vary WILDLY. Percent changes in spot prices are magnified.

e.g. Aluminum extrusions (the best grade) are down to 8 cents a pound. It was 80 cents a pound as recently as 3 years ago. The aluminum price hasn't changed that much.

Steel was 10 cents a pound. Now, it's 1 cent a pound. That steel price is quite related to China's industry.

Normally, the scrap dealers who make up the "recycled" category for industrial metals, would profit greatly from this kind of price action.

However, the recycled "Ferrous" (iron, steel, etc.) price is so low, the only incentive to sell scrap Ferrous (the tin cans in the driveway), is the desire to clean up the driveway.

The money I get barely covers the gas to drive to the scrap place, and definitely doesn't cover the increased risk of getting a flat from metal debris they neglect to clean from the floor.


Because China's economy is partially built on quicksand (unstable foundation metaphor), I would expect any prices that depend on bubble financing to be "more volatile" (which may seem like an understatement to those who lose money in the process.)


The other part of the question relates to the unique cycles of the resource business.

>> supply destruction leading to much higher prices in the future.

Rick Rule does a great job explaining this market pattern.

Seems logical for the boom/bust pattern to continue as long as (for example) the CFTC maintains its
"see no evil hear no evil" stance on options regulation, physical prices are set in paper/digital markets,
and money that would normally flow into physical is diverted into synthetic.
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China and Commodities 4 months 2 weeks ago #4

  • Michael Gebhart
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Thank you so much LBL and sck for your firsthand experiences. It sounds like China is still building up and real estate is likely one of the few places where people can park their savings (or speculate with credit). If that is the case then they haven't melted down yet but are slowing down hence the cheaper metal prices LBL mentions. If that is the case then maybe there is one more low in commodities. If the banks there do melt down though I wonder if they will just stuff the banks full of bail out money. That would weaken the RMB and put a damper on their ability to buy commodity imports. Raoul Pal seems to think the US will roll over soon too.


Mike
Last Edit: 4 months 2 weeks ago by Michael Gebhart.
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China and Commodities 4 months 2 weeks ago #5

  • tankumo
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Great info gentlemen!!!

But I think the key is to watch India.
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China and Commodities 4 months 1 week ago #6

  • Michael Gebhart
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Why India? Think their new government will actually reform the economy?



Mike
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China and Commodities 4 months 6 days ago #7

  • tankumo
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India has more room to grow, China has grown a lot. And the population of India can grow much faster too.

I see India having more potential.............................JMO
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