Courtesy of Mish.
Inquiring minds as well as commodity bulls need to consider the likely economic impact of China’s commodity imports and how sustainable those imports are.
For example, please consider China’s Cotton Reserves Enough to Meet Deficit for Six Years
Cotton stockpiles in China, the world’s biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the country’s deficit for the next six years, according to Allenberg Cotton Co.
Inventories are rising as the government boosts purchases to support domestic prices and lift farmer incomes, Joe Nicosia, chief executive officer of world’s largest cotton trader, said at a conference in Hong Kong today. The country may buy 5 million tons for reserves this year, up from 3.2 million tons a year earlier, he said.
“As long as China maintains this regime to subsidize cotton farmers, the world will be prone to overproduction,” he said. “Can you imagine a world without China importing any cotton for six years? They hold all the cards.”
What About Copper?
A similar setup has developed in other commodities, especially copper. Please consider the FT Alphaville story China’s growing copper fetish
Commodity Imports and Balance of Payments
Michael Pettis at China Financial Markets has given considerable thought to the economic impacts (and distortions) of commodity speculation and writes via Email …
When it comes to defining the balance of payments components I don’t think all commodity imports should be treated equally. Commodities that are imported for use or for working inventory should certainly show up in the current account, as they do. Commodities that are imported for speculative purposes or for stockpiles, however, should be included in the capital account, since they really are a form of external investment more than a form of domestic consumption.
This is how they would recorded, for example, if rather than import physical commodity for storage a local speculator purchased a commodity-linked note from abroad. There is no real economic distinction between the two transactions, but the former would be treated as a current account import while the latter would be treated, correctly, as a capital account export.
This matters because the numbers can be significant, and so heavily distort the balance of payments numbers. br />
Cotton stockpiles in China, the world’s biggest importer, are set to climb to about 9 million metric tons this season, enough to cover the country’s deficit for the next six years, according to Allenberg Cotton Co.When you have stockpiled enough cotton to cover the next six years of imports, it seems to me, most of your stockpile represents a speculative bet on cotton prices. It should be treated no differently than any other speculative bet, and the fact that it warehoused domestically rather than off-shore is largely irrelevant. …
