Why are Chinese companies increasing purchases of industrial commodities? #CommoditiesWeek

A recent article in the Financial Times has explained why Chinese investors are showing their confidence in industrial commodities by their recent increase in purchases in metals -  copper particularly. Chinese companies have not reacted negatively to the fall in commodities prices this month, and have instead taken advantage of this dip in pricing, and rebuilt their stocks at a lower value.The Financial Times article, by Jack Farchy and Javier Blas goes on to explain their surge in buying copper:

“China is significantly less pessimistic relative to people in the western world,” said Raymond Key, head of metals trading at Deutsche Bank. “On dips they are restocking, especially in copper.” An executive at an important Chinese trading house added: “There is no doubt some traders have been buying [copper] recently.”

The surge in copper buying benefits the largest exporting nations, including top producers Chile and Peru, and miners such as Freeport McMoRan Copper & Gold, BHP Billiton and Xstrata, and trading houses such as Glencore and Trafigura.

Copper prices fell to a 8-month low of $8,446 a tonne in early August, but since then prices have risen more than 9.0 per cent to $9,225 on Tuesday.

China accounts for 38 per cent of global copper demand, and as such has the power to almost single-handedly prop up the market even if companies in the west are holding back. Nonetheless, traders warned that Chinese buyers could rapidly step back from the market if they believed prices would fall further.

The buying by China marks a reversal of the trend in the first half of this year, when consumers in the country made minimal purchases of metals such as copper, choosing instead to run down their inventories as the government’s drive to tighten credit reduced their ability to import large volumes. China’s net copper imports in the first seven months of the year were down 37 per cent from the same period in 2010.

Glencore, the world’s largest commodities trader, said that so-called bonded warehouses stockpiles had seen a “significant drawdown”. It estimated that stocks have “at least halved” since the beginning of the year.

The strength of demand by China in the past four-to-six weeks has been buoyed by a jump in the strength of the renminbi, which makes importing commodities cheaper for Chinese traders. Western traders said that some large Chinese buyers had been able to access credit more easily, enabling larger purchases – although they cautioned that credit is still tight for smaller companies.

“We have seen our Chinese counterparties [have] been able to open significantly larger letters of credit than in the first half of the year,” a senior trading executive in Geneva said, referring to a typical financial instrument used on trading.

In a sign of China’s increased appetite for copper, the price of the red metal at the nearby hubs of South Korea and Singapore has in the past two weeks jumped relative to the benchmark London Metal Exchange’s price, brokers said.

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