Thursday, May 05, 2011

Yet, ANOTHER View on Copper Prices

This is posted for the sake of our frequent inflation-denier/commenter Strupp. It sure is an interesting theory.

...Since January I’ve been writing about – and trying to figure out – the strange happenings in the Chinese copper market

...China had been importing for many months far more copper than was needed for real use...copper was being stockpiled in warehouses.  Why?

...It turns out, that the copper purchases were not entirely, or even mainly, speculative.  They were part of a financing scheme for companies that, in spite of the avalanche of new lending occurring both within and outside normal RMB lending, were having trouble accessing bank credit. 

credit-starved companies were importing copper because they could obtain trade finance or some other sort of foreign financing, and then used the physical copper (or warehouse receipts, I guess) as collateral for domestic borrowing.

Now IF that theory is true, the 'recovery' usually predicted by increases in the price of copper is not imminent at all. Since copper wasn't being used for industrial consumption, ....yadayadayada.

HT: Mish


J. Strupp said...

Interestng reading.

Of course, the underlying issue here is the inflation crisis in the PRC due to massive trade imbalances that exist between us and them. Producers WILL find a way to access credit in an overheated economy. This is a good example of one.

Increasing reserve requirements won't curb inflation. Rationing credit to producers won't do it. The PRC needs to allow significant RMB appreciation to temper growth and contain inflation. End of story.

And I'm not an inflation "denier" Dadster. Commodity inflation is real (right now), however, it's a horrible indicator of inflation expectations. Especially with high unemployment and stagnant wage growth.

J. Strupp said...

Speaking of inflation expectations, how's are yields for long-term U.S. treasuries these days?

Dad29 said...

Haven't looked. How's Stimulus working?

J. Strupp said...

Haha what stimulus?