We're familiar with the concept of strategic oil reserves but a strategic reserve of rubbish? Actually, the huge pile of unwanted recyclable materials like glass and cardboard now piling up in warehouses around the world will only get bigger, but the Chinese government is aggressively stimulating the global scrap metal industry with a focused bailout plan of its own. A few weeks ago, China’s State Reserve Bureau announced that, in an effort to stimulate the collapsing non-ferrous metals sector (ie aluminium, copper, lead, zinc and tin) it would fund the acquisition of a large non-ferrous metal stockpile. Soon after, Yunnan Province (home to a large non-ferrous industry) announced its own strategic reserve to include 300,000 tons of aluminum, 100,000 tons of tin, 300,000 tons of zinc, 150,000 tons of lead, and 150,000 tons of copper.
In the wake of the economic crisis, and the collapse in China’s export manufacturing sector, the non-ferrous metals industry nearly collapsed due to a lack of demand and excess inventories purchased at record prices. As a result, raw material suppliers, including US scrap metal dealers and Australian miners, found that, in the space of a few months, their biggest customer simply stopped buying. Now that's all changing fast.
Trade statistics show that China imported 5.58m metric tons of copper scrap last year, and 2.15m tons of aluminium; the outlook for 2009 would be for a massive decline in these levels based on fundamental industrial demand. But there has been a dramatic surge in demand from Chinese scrap metal consumers in recent weeks, explaining in part the relatively strong performance of many metal prices despite the grim economic outlook and record LME stockpiles (eg copper 5 year high, aluminium all-time high). Can China stockpile until its manufacturers begin demanding metal for their factories as end-consumer industrial demand recovers? At some point these stockpiles will have to be released back to the market, and will become a key influence on non-ferrous metal prices medium term. Another consequence is the market power it bestows upon the larger, mostly state-owned metal firms allowed to stockpile metals with government money versus the many small, independent private smelters and will add to the intense pressure on them to rationalize. Above all, it is another example of the huge distortions radical government intervention around the world is creating in markets, and adds a new layer of complexity to investment decision making.