Commodities | May 12 2006
By Chris Shaw (Tokyo)
The surge in commodity prices this week, while partly in response to higher geopolitical uncertainties, is believed to also reflect the latest five-year plan of the Chinese government to build strategic stockpiles of commodities.
The new plan of the Ministry of Land and Resources is designed to build up China’s supplies of the commodities it needs most for its ongoing development such as uranium, oil, copper and aluminium. The stockpiles would also better insulate the country from supply disruptions and uncertainty such as is the case in the oil market currently after the latest reports of disturbances in Nigeria.
The aim of the plan is reportedly to create sufficient reserves, though there was no detail as to what level of reserves that implies. Some in the market have estimated China will attempt to lift its proven reserves of iron ore by as much as five billion tonnes, copper by 20 million tonnes and bauxite (used in making aluminium) by 200 million tonnes.
Reports also indicate there will be an increase in oil reserves from 500 million tonnes to around five billion tonnes, natural gas stockpiles will grow by 2-2.25 trillion litres and coal by 100 billion tonnes.
Not everyone is convinced about the veracity of the proposal though, as some dealers have suggested the plan is actually a move to invest more in exploration domestically while also pouring money into joint ventures and purchases of commodities assets overseas.
US based trading guru Dennis Gartman suggests if China was actually interested in building strategic stockpiles it would have begun the process some time ago, so is unlikely to be openly talking about such a process now. He dismisses the talk as idle rumours, but considers it strange the market is paying as much attention to the talk as it is.
The result has been to add fuel to the commodities fire, which has seen the prices of both precious and base metals gain significantly this week, while oil has again pushed through US$70/bbl. Indicators suggest the markets are overbought and in need of a correction, but as of yet there is no indication as to when a correction could occur.