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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
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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.
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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
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With tighter Chinese credit availability and growing inventories, could a materiacorrection in copper (and other metals) be looming?
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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
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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
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Chinese Metals Demand: Poised to Correct? August 21, 2009
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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.
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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
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Funds advised by Salida Capital
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Salida Strategic Growth Fund — Inception: Fall 2009
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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