According to China Daily, China's Ministry of
Industry and Information Technology is currently drafting a
guide to mergers and acquisitions in the iron and steel
industry, and to curb overcapacity will disallow expansion
projects in the steel industry for the next three
years. Here's what I've been worried about: "annual
production capacity is currently 660 million tons, while
demand is only 470 million tons, indicating a surplus of 190
million tons, said Li Yizhong, minister of MIIT. Furthermore,
projects that will add 58 million tons of capacity are under
construction."
From rice hoarding to stockpiling copper, China's merchants
have a long history of commodity speculation and today
appears to be no different. With Chinese exports and US
consumption down, the bet is that things rebound soon and the
Chinese will have locked in cheap iron ore, copper, and other
commodities. (As an example of the speculation, copper
has risen 4.6% this week alone and might break $3.0) So
far, demand has not rebounded to match the significant rise
in commodity prices.
From yesterday's retail sales disappointment to today's lower than expected University of Michigan's sentiment index, we see that the US is not consuming like it has in the past. Since China's economy is 40% exports, you have to wonder how long domestic growth can spur GDP.
What's worrisome for the United States is that inventory
rebuilding and CAPEX is expected to lead growth in Q3 and Q4.
Granted we've fallen so far, everything looks up from here.
Yes, the economy has stabilized, but stabilized at extremely
low levels. It looks like the Chinese are building
things that no one is buying and their inventories are going
up.
This has major implications for the Pacific Rim and for
global commodities. Something has to give and give
soon. We need to have a rebound in global demand or we'll see
bad things happen to commodity prices.
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