8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 1/6

Chinese Metals Demand:

Poised to Correct?

Authored By The Salida Capital Investment Team

August 21, 2009

This topical report is authored by the Salida Capital Investment Team on a monthly basis. Each report highlights a currenttrend, 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.

S ali d a S p e c i al R e p o r t 

Profit | Diversifyubscribewww.salidacapital.com

www.btrfunds.com

8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 2/6

8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 3/6

But enough is enough. Amidst concerns over soaring equities, commodities, and rea

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.

What happens if this tempering of loan growth continues? In June, economist We

 Jianing of China’s State Council estimated (unofficially) that as much as 20% of newbank 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 smal

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.

Profit | Diversify2

   S  a  l  i  d

  a

   S  p  e  c  i  a  l

   R  e  p  o

  r  t

Chinese Metals Demand: Poised to Correct? August 21, 2009

Source: People’s Bank of Chin

Chinese Banks’ Monthly Loan Growth (Trillion Yuan)2.0

1.6

1.2

0.8

0.4

0.0

-0.4

 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2006 2007 2008 2009

8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 4/6

With tighter Chinese credit availability and growing inventories, could a materiacorrection in copper (and other metals) be looming?

Profit | Diversify3

   S  a  l  i  d

  a

   S  p  e  c  i  a  l

   R  e  p  o

  r  t

Chinese Metals Demand: Poised to Correct? August 21, 2009

Source: Bloomberg

China Imports of Refined Copper & Alloys

(’000t)

Copper Price

(US$/lb)

400

300

200

100

0

3.00

2.00

1.00

0.00

 Jan

Source: China Customs

Apr Jan 09

2008 2009

 Jul Oct Apr 09  Jul 09

Source: Shanghai Futures Exchange

SHFE Copper Inventories

(’000t)

SHFE Zinc Inventories

(’000t)

75

50

25

0

120

90

60

30

0

Q 1/09

Source: Shanghai Futures Exchange

Q 2/09 Q 3/09 Q 1/09 Q 2/09 Q 3/09

8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 5/6

To be clear, we remain steadfastly bullish on the China story in general and of

commodities in particular — at least over the intermediate to long term. However

a combination of aggressive Chinese government intervention and leveraged

momentum buying among individual and institutional buyers alike has lifted metals

prices dramatically this year, with barely a pause. A sudden tightening of credit

availability could certainly prove the catalyst to a material sell–off in commodities held

in “weak hands”. The Chinese stock market has already corrected in rapid fashion

Could metals prices be next?

While some may argue that a recovering U.S. and/or Europe could pick up the slack i

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!

Market Opportunity

Profit | Diversify4

   S  a  l  i  d

  a

   S  p  e  c  i  a  l

   R  e  p  o

  r  t

Chinese Metals Demand: Poised to Correct? August 21, 2009

8/14/2019 Special Report - 2009-08-21 - China's Metal Demand

http://slidepdf.com/reader/full/special-report-2009-08-21-chinas-metal-demand 6/6

This report is published by Salida Capital Corp. (“Salida”). The information contained in this report does not constitute a recommendation by the authors or So buy or sell any of the securities, commodities, currencies or other financial instruments or assets discussed herein. This report has been prepared using informrom sources that the authors and Salida believe to be reliable, however neither the authors nor Salida guarantees the accuracy of such information. This reporot constitute and may not be used for the purposes of effecting an offer or solicitation of shares of any “Salida” or “BTR” Funds (the “Funds”). Important informbout the Funds is contained in their offering memorandums, including a detailed description of the Funds’ investment objectives, investment strategies and risk fa

nformation in this report is qualified in its entirety by the relevant offering memorandum.

www.salidacapital.com

www.btrfunds.com

Salida Capital

2 Bloor Street W. Suite 2700 Toronto, ON, Canada M4W 3E2

Phone: 416 849 2555 Toll Free: 866 213 0291 Fax: 416 849 2552

Email: sales@salidacapital.com

Salida Capital was founded in 2001, and is a leading international alternative investment management firm

committed to providing innovative investment solutions that deliver superior absolute returns in the mid

to long term. Through a number of funds and separately managed accounts, Salida Capital offers world

class investment expertise, innovative products, disciplined investment strategies and a commitment to

transparency and service excellence.

Funds advised by Salida Capital

canadianSalida Multi Strategy Fund — Inception: November 2004

Salida Strategic Growth Fund — Inception: Fall 2009

internationalBTR Strategic Growth Fund — Inception: March 2009

BTR Global Energy Fund — Inception: January 2006

Past Reports

World Markets Watch April 2009

World Markets Watch May 2009

World Markets Watch June 2009

World Markets Watch July 2009

Special Report: Uranium Shortage Looming? April 2009

Special Report: U.S. Natural Gas: A Coiled Spring May 2009

Special Report: Cautious on Copper ... For Now June 2009

Special Report: Chinese Metals Demand: Poised to Correct? August 2009

The Energy Report June 2009

The Energy Report July 2009

The Energy Report August 2009