Pisani: China's Commodities Buying Spree

How do you write "glut" in Chinese? China stockpiles massive quantities of commodities.

Imagine if the President of the United States could decide—with no input from anyone—that he was going to buy copper and aluminum and iron ore in massive quantities, then warehouse it and figure out a way to use it later.

That's exactly what has happened in China. Overnight, Aluminum Corporation of China said that Chinese smelters, traders, and warehouses were holding as much as 600,000 metric tons of inventories due to surplus output, far more than reported stocks held by the Shanghai Futures Exchange.

Those are just the private reserves. Chalco, as ACH is known, said that China's State Reserve also bought 570,000 tons, which has been stockpiled.

How did that happen? Beginning earlier this year, Chinese authorities—and the industries under their control—began buying massive quantities of commodities, which helped turn around the commodities slump.

How do we know that? Because Chalco said that the Chinese government was actively buying aluminum (and other commodities, we can assume) from March through May of this year. What happened in that period? Copper prices went up 60 percent, aluminum prices almost 20 percent, and have gone up dramatically since then.

Aluminum Corp. traded down because the company posted a larger than expected first half loss. Little wonder: demand has been weak, aluminum prices, while up from their lows, are still historically weak, and there is enormous—and growing—excess aluminum capacity globally.

Despite the weak demand, Chalco is ramping up production under the theory that demand will improve and prices will stabilize. Chalco officials insist that this overcapacity will be resolved within 3 years (!)

There's signs Beijing is finally understanding they have a glut on their hands. China's Cabinet said they would use "enhanced management" to curb overcapacity and excessive investment in several industries, including steel and cement.

Here in the U.S., the Commodities Futures Trading Commission (CFTC) is investigating the role of speculators in the commodities market. The mere mention of this investigation has sent commodity ETFs into a tizzy, as the administrators of these ETFs worry that they may be investigated.

If the CFTC is truly worried about speculation, how about sending a note asking for testimony from Chinese Premier Wen Jiabao? Or is the premier exempt under the grounds that the Chinese government are professional hedgers?


1) A top for oil? The failure of oil at $75 was a big story yesterday, with energy stocks suffering, and oil is again showing signs it is having trouble rallying this morning. Weekly inventories at 10:30 AM ET.

2) Williams-Sonoma soars 11 percent after turning in a surprising Q2 profit (gain of $0.05 vs. loss of $0.09 est.). Comp. store sales dropped 15 percent, but heavy cost cuts helped the home furnishings retailer move out of the red, as it cut spending, closed stores, and managed inventories better.

With profitability also expected to continue in the third quarter (vs. Street forecasts for a loss), Williams-Sonoma significantly boosts its full-year earnings outlook from $0.07 loss-$0.11 gain to gains of $0.19-$0.31. However, much of the rise in that outlook comes from continued cost cuts, as the retailer only raises the low end of its sales guidance slightly.

3) New York & Co. reported a Q2 loss inline with estimates. The women's apparel retailer saw same-store sales fall 16.4 percent, but was able to cut costs and reduce inventories in the quarter.

Looking ahead, the company announced it was no longer providing specific sales and earnings guidance. However, it sees second half same-store sales declines moderating from first half levels and margins improving particularly in the fourth quarter.

4) The Mortgage Bankers Association reported that mortgage applications rose 7.5 percent last week—led by a 12.7 percent rise in refinancing applications. Mortgage applications for home purchases were only up 1.0 percent, but rose for the fourth straight week to a 7-week high.

5) German IFO business confidence rose to the highest level since Sept 2008.

The Mortgage Bankers Association (MBA) said refinancings rose to an 11 week high and purchases rose to a 7 week high.


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