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This topical report is authored by the Salida Capital Investment Team on a monthly basis. Each report highlights a current
trend, theme or idea of significant interest that we are actively following. The majority of our investment funds are
fundamentally driven at the position level however our viewpoint on macro themes is instrumental in determining the
strategies and sectors we focus on to explore and uncover investment opportunities. Correctly forecasting and understand-
ing these macro themes has played an instrumental role in our long term successful track record and will continue to be a
critical element in how we manage investments going forward.
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Salida Special Report
Chinese Metals Demand: Poised to Correct? August 21, 2009
Market Outlook
In the midst of all the euphoria and burgeoning optimism over global economic “green
shoots”, a funny thing happened. China, the world’s economic bright spot this year, has
suddenly seen its stock market tumble. And not exactly a mild tumble — a near bear
market plunge of 19.8% in a mere two weeks.
3,000 300
2,000 200
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0 0
Jan 09 Apr 09 Jul 09 Jan 09 Apr 09 Jul 09
The aggressive fiscal and monetary measures undertaken by the Chinese Government
over the past several months have been nothing short of stunning. Its 4 trillion yuan
(US$586 billion) spending package has been well–documented, as has the country’s
highly accommodative monetary policy. Perhaps the most striking indicator of the
government’s efforts is the enormous growth in bank loans this year. Interest rates
were slashed, reserve requirements cut, and loan quotas abandoned. Beijing told the
banks to flood the economy with money — and the banks enthusiastically complied.
Through the first six months of 2009, Chinese banks made a whopping 7.4 trillion
yuan (US$1.1 trillion) in new loans — three times as much as in the first half of 2008
and considerably greater than the government’s full year target of 5 trillion yuan.
What credit crisis!!!
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Salida Special Report
Chinese Metals Demand: Poised to Correct? August 21, 2009
But enough is enough. Amidst concerns over soaring equities, commodities, and real
estate and the growing potential for serious bad loan problems, Chinese officials have
allegedly told the largest state–controlled banks to rein in the pace of lending.
And it looks like the banks once again are following instructions. July’s loan growth
was not only much lower than previous months, but was also down year–over–year —
the first such decline since last fall.
1.6
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0.8
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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
What happens if this tempering of loan growth continues? In June, economist Wei
Jianing of China’s State Council estimated (unofficially) that as much as 20% of new
bank lending had gone into stock speculation, and an additional 30% into the property
market. A sudden disappearance of easy credit could lead to a plethora of margin calls
and forced sales which could reverberate throughout Chinese stock and commodity
markets. Thus far (through June) Chinese copper imports have remained at lofty
levels. However, in recent days, the price of copper has quietly slipped about 5% from
2009 highs. Meanwhile stories continue to circulate about individuals and small
businesses in China having made leveraged bets on an ever rising copper price. Stories
also suggest that Chinese production of refined materials and intermediate products
continue to exceed demand as local officials frantically keep plants running in order to
keep GDP numbers up.
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Salida Special Report
Chinese Metals Demand: Poised to Correct? August 21, 2009
300
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Jan Apr Jul Oct Jan 09 Apr 09 Jul 09
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With tighter Chinese credit availability and growing inventories, could a material
correction in copper (and other metals) be looming?
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Salida Special Report
Chinese Metals Demand: Poised to Correct? August 21, 2009
Market Opportunity
While some may argue that a recovering U.S. and/or Europe could pick up the slack if
Chinese buying wanes, we are somewhat skeptical. Some restocking in the Western
world may indeed occur, but how aggressively? At prices near multi–month highs?
With major economies still struggling?
Infrastructure building is by nature highly metals intensive, and China will most likely
undergo a dramatic transformation in the years and decades ahead. So we have little
doubt that real demand will ultimately soak up tremendous quantities of copper and
other commodities. But it is also entirely possible that the market has moved too far
too fast. With the likelihood of tighter Chinese credit conditions, higher inventories,
and the always tense September–October period approaching, we feel that a more
cautious positioning is warranted for the near term. That said, we would not expect
an outright collapse or anything approaching last year’s carnage. Central banks
worldwide are still printing money aggressively and safe haven investments
(i.e. treasuries) are offering miniscule yields. As such we would look to boost exposure
to metals and other commodities on any material weakness. Buy the dips!
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