China Moves & Implications for Commodities & Metals

China Moves & Implications for Commodities & Metals

November 5, 2010

By:  Marco G.

http://goombarhsedge.blogspot.com/

On November 3, 2010, Bloomberg had this title "China to Sell 50,000 Tons of Zinc From Reserves as Power Cuts Lift Prices".  From that report, we get a glimpse of what China has been stockpiling:

China bought 235,000 tons of copper, 590,000 tons of aluminum, 159,000 tons of zinc, 30 tons of indium and 5,000 tons of titanium for reserves, Caijing magazine reported in June last year,

In hindsight, it was in plain sight and obvious, China was using their US currency reserves and exchanging them in return for goods with hard value, the metals, for their strategic stockpiles.  They are definitely growing for the foreseeable future and these materials will be needed for their infrastructure building.  This information of China releasing a portion of their Zinc stocks into their marketplace, indicates a possible forthcoming shortage (a secondary reason is in the above article - power cutbacks will reduce production).  Take a look at Kitco's six month Zinc price chart.  Since June of this year, Zinc has moved from 70 cents USD a pound to the price of $1.13 today.  Zinc's main usage is in industry as an anti-corrosion coating for steel.  For Zinc prices to move like that and the stated Chinese anticipating a shortage coming, means that construction and infrastructure building is increasing.  This Chinese positioning tells us that economic revival is at hand, never mind the noisy pundits that are still distracting us and calling for caution, double dip is ahead.

Precious Metals Bull

In the midst of the commodities and metal prices up swing, the precious metals are enjoying their own boom.

Last week, the Commodities Futures Trade Commission (CFTC) alleged market manipulation in silver markets:

Oct 26 (Reuters) - There have been repeated attempts to influence prices in silver markets, Bart Chilton, a commissioner at the U.S. futures regulator, said on Tuesday.

The precious metals markets responded brightly as the news was disseminated and investors felt that the scrutiny would cause the perpetrators to refrain and the markets would move higher. 

Recently there is much speculation in the precious metals blogs about large Asian players buying into the precious metals.  This adds further to the raucous behaviour of the precious metals prices.

Irfan Chaudhry, another Seeking Alpha contributor, recently presented good research about Central Banks buying back into Gold:

·         Central banks will keep diversifying their reserve holdings into gold without trying to convey any price information to the market.

·         US dollar part of reserves has seen most of diversification as dollar reserves have declined more than euros and other currency reserves. Expectation of further weakness of dollars may exacerbate this trend (a positive feedback)

·         China, Middle Eastern countries, Russia and India will stay as most aggressive diversifiers of their reserves into gold.

These reported Central Bank actions would explain some of the price supports for the precious metals overseas.

Mining Juniors

The China moves with Zinc and the precious metals boom make for an interesting time in the markets.  "Interesting" in this context means exuberant, especially for small metals miners. 

The author has stated his preferences in small metals miners as in mining Juniors in his previous articles on Seeking Alpha. 

For selection of companies to invest in, the author uses one attribute as paramount for success - the quality of management of the company.  All other company attributes such as projects, locations, grades, etc. fall by the wayside in importance, relative to the perseverance, integrity and intelligence of the small company management.  It all comes down to whether the management's goal is to create sustaining value for the shareholder.

Mining Environmental Side Note

As a counter example, the Canadian government recently delivered a rounding blow to Taseko Mines (TGB) on November 1, 2010.  In a scathing rebuke to the Canadian miner about their proposed  copper and gold "Prosperity" project in British Columbia, Environment Minister Prentice denied their operating permit. 

Though the mine was supported by the  provincial government, there was concerted first nations opposition to the project.  The opposition was centered around lack of consultation and the proposed filling in of a lake with mine tailings.

Franco-Nevada (FNNVF.PK) is also affected by this development as they had signed a royalty agreement in May 2010 of $350 million with Taseko for future off take of the Gold production from Prosperity. 

Due to the inability of Taseko's management to handle the environmental impacts, Taseko's stock price dropped 30% on the government denial.

Investor Action

The author sees much upside ahead for commodities, metals and junior miners in the markets.  Investors are advised to be selective in their choices of mining equities, for the possible gains to be sustainable.  The author is participating in the metals, gold and silver bull markets and has invested in junior metals and precious metals mining equities.

Disclosure: The author is long junior mining equities.
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