China Craves Commodities

01/18/2010 9:04 am EST


Gregory Weldon

President and CEO, Weldon Financial

A rip-roaring consumer boom in the world’s most populous country is driving up the price of sugar and platinum, writes Gregory Weldon of Weldon’s Money Monitor.

The most violent winter storm in 50 years has buried Shanghai and Seoul with the heaviest snowfall in five decades, amid the coldest temperatures in, yes, half a century.

Indeed, China and Korea are snowed in. Chinese power generation has blasted through the snow-covered roof, expanding by 27.3% [recently] versus a year ago, causing cities to begin cutting power due to depleted supplies of thermal coal. Indeed, coal stocks held within the Jiangxi Province are 33% below the minimum government requirement, with several cities watching coal inventories dwindle to less than ten days of usage.

The domestic situation is defined by a dual-edged sword, with less supply being generated (output is shut-in by the storm) and greater demand—not only as it concerns coal, electricity, or other energy products but also as it relates to other commodities, particularly food.

For sure, commodity prices are storming higher across the board, not just because of an arctic blast in Asia, but more so because of the commentary carried in the China Business Journal, quoting an anonymous source inside a government-owned lender as saying that state banks will be “authorized” to extend more new yuan loans in the first quarter of this year than last year.

This is significant, and provides a potentially more perfect storm for the commodities markets than a mere snowstorm, as a credit blizzard is being forecast for China, blanketing the country with new money.

Domestic strength in China is extending beyond infrastructure and into the local consumer demand dynamic, as was clearly evidenced within the most updated data for retail sales.

Shanghai’s 100 medium and large retailers reported sales of more than 1.5 billion yuan from December 31st to January 3rd, a year-over-year increase of 37.6%, while sales in the Yuzhong district rose 20% versus year-ago.

The Hangzhou department store reported a 60% rise in jewelry sales, versus last year. Catering in Shanghai soared, rising by an eight-hundred-pound-gorilla-like 66.8% versus last year. Retail sales were led by household appliances, with specific strength in LCD TV demand, 3-G mobile phones, and reflex cameras. The government also cited strong demand for clothing, gold and silver jewelry, and cars, with the latter posting a 30% year-on-year expansion.

Sugar traded in Shanghai soared by the daily limit of +/- 4% [earlier in the week], reaching a new contract high. Subsequently, thoughts of an already tight global physical market getting even tighter on the back of an intensified Chinese supply-demand imbalance [drove] New York based futures on the World #11 Sugar contract to multi-decade highs.

We are already bullish on sugar, along with cotton, corn, and soybean oil, and now we add platinum, [which is attempting] a full-blown up side technical breakout.

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