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Chinese expert on Chinese Whisper

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Chinese whisper and so he says...

In my second incident, last week the Chinese were stating in the various metal bulletins that they were going to stop strategic stockpiling of copper, aluminium and other minerals. In Eureka Report I alerted readers that there could be a short term metal price correction if China actually plays that game...
** hmmm, hmmm... there could be a short term metal price correction? Only short term?

I am not that sure if that will turn out to be just a short term maneuver in this metal game with some of the recent Chinese initiatives. Of these, the most important being their purchase of bulk ships in the second hand market. With that number of ships, they have practically removed a transportation price premium from the S.American iron ore; and in retrospect, Marius K's tact in buying up all shipping capacity to push for the last 15% has done tremendous harm to the Australian iron ore sector because he has practically singlehandedly taught the Chinese a lesson and highlighted one of their vulnerabilities.

Now that the Chinese have learned from the lesson and have covered their base by owning their own fleet of ships, there goes a strong negotiation point on the Aussie ore advantage of low shipping cost comparing with the Brazilian's.

Secondly, the recent restocking of most base metals, esp iron ore although has helped pushing up the price but I believe its strategic value is the one that is being overlooked by the Aussie miners - the Chinese have bought themselves a strong lead time/buffer to play an attrition game - whoever blink first lose, or whoever need the cashflow for on going operation will crack under the pressure first.

Of the three BHP, RIO and Vale, I think RIO is the most vulnerable and without the big long term contracts to provide a regular stream of cash flow, I can't see how it can operate effectively. On top of that, it still carries a large debt in its book. The possibility of it buckles first frankly is high. As pointed out earlier, those who are paying a premium to get into the rights issue will be crying all the way to bed, and not to the bank.

Thirdly, from the way the CISA is pushing its case, it seems to be getting top level support from the Chinese leadership, it won't be a surprise to see it fixing up those non-cooperative steel mills who have broken rank earlier. More than likely there will be another round of shake up and shake out. Longer term, this can't be good for the suppliers when they have a unified voice.

With all the above developments and after spending billions covering all or most bases, I am not sure if the Chinese are just planning for short term only... if the above Chinese expert is still believing that is a short term maneuver, well, let's just wait and see.

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  1. haunting's Avatar
    A follow up news item from Bloomberg

    “We have a number of contracts that when they get to June 30 there is the potentiality for those agreements falling away and then moving to spot,” Sam Walsh, chief executive officer of the London-based company’s iron ore unit, said on May 26. “I don’t think that would be a good thing for either iron ore producers or steel producers but that’s the reality.”
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