Wednesday, October 12, 2011

Chinese Copper Inventories May Be Bigger than We Thought

According to the Financial Times:

China has for the first time revealed the estimated size of its copper inventories, shedding light on one of the commodity market’s biggest mysteries.

Chinese copper inventories stood at 1.9m tonnes at the end of 2010, more than the US consumes in a year [and] significantly higher than the 1.0m-1.5m tonnes range that foreign executives have assumed in the past.
More support for my Treasuries versus copper trade idea. Not only is there a divergence between the implicit probability of deflation represented in Treasuries and base metals like copper, but the fundamentals for copper are very poor. Demand has been pumped up by the Chinese construction bubble and by Chinese inventory building.

There is another cross-asset class inconsistency, namely energy companies versus other equities. I noticed yesterday that a Reuters columnist had picked up on this:
Economic fear has taken a heavier toll on U.S. oil company shares than on crude itself. Either there are bargains among the stocks of oil explorers, or commodity investors are too bullish. The difference of opinion ought to mean there’s room to make money.
Yes. This is why energy (especially higher in the capital structure) has been the place to be as a hedge against equity shorts.

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