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China’s Olympics Vacation – How Real is the Drop In Commodities and Inflation?

We all know the relief madness over the past week or so: oil got denied when it almost tapped $150 and dived to $123, taking down the rest of the commodities world- metals, agriculture, coal…you name it. Meanwhile, banks hit a trampoline and the XLF rebounded some 50% off the lows. Yes, it’s great to see gas here down to $4.59 from $4.89 just 2 weeks ago. Sure, maybe it’s the speculators the regulators have now caught, or maybe it’s money coming out to chase the banks off their lows.

But- what if it’s because China has halted a big chunk of it’s manufacturing to clear the air for the Olympics that starts exactly in 2 weeks? I haven’t figured out the effects yet. Just thinking what will happen starting September, when the Olympics are over, and the China manufacturing beast roars to life again? Devouring commodities for breakfast, lunch, dinner, and a midnight snack 7 days a week – because the Chinese are workaholics and wouldn’t know what to do if they had a day off? (I am serious – this is what my dad tells me from his business trips to China every 2 months) Sure, one could argue that China has been limiting it’s manufacturing to clean up it’s air since early in the year, yet commodities kept climbing. There probably was quite a bit of speculative money or money that sought safe haven away from the banks. However, China did not completely slam on the brakes till recently. And, had China not been slowing down it’s manufacturing all year, where would commodity prices be even without the speculative money? Would oil be at $150, and in that scenario NOT be due to speculation? Meaning, where should we expect commodities to rebound to once China goes full steam again?

Also, for those hoping China slowed down because the U.S. and Europe have slowed to a crawl, I beg you to do more research and think again. My dad and his business partners are having trouble placing their orders at factories in China because domestic demand is too strong. Factories are actually turning down orders for exports, the very exports that catapulted China’s economy to the fastest growing. If I had to place a wager, I’d bet China’s recent weakness is self-imposed for the Olympics, and not because it’s being dragged down by U.S. slowdown. Again, we Americans always thinking we’re the center of the world, and the rest of the world depends on us. This is a very dangerous tunnel vision and, as Mitt Romney said, will turn us into a second rate country like France in no time.

My dad is currently visiting factories in China, saying his factories have been required to set aside roughly ~20% of steel for China’s domestic use (so he can’t get his products made as they’re exported here to the U.S.) This restriction is because steel mills have been shut down to clear the air for the Olympics. Also, he says China is fixing steel prices 20% – 35% below market prices specifically for the earthquake rebuild. This is to ensure steel availability to the damaged areas.

This corresponds with the following reports from Capital Link Shipping’s Imarex report (yes, shipping research websites are great even if you’re not rolling the dice on a DryShips):

Steel mills affected by the Olympics have finally begun suspending production to ensure clean air in Beijing. Domestic Chinese steel consumption, although very strong, is also expected to come down a bit due to a normal summer lull in consumption. In addition, production costs (iron ore, coking coal, credit issues) and coke shortages are making it harder for small steel mills to keep up production. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly22.pdf

And on the July 25h report:

All eyes are on China / Olympics. The skies in Beijing are still smoggy as hell, expectations point to a slowdown in industrial production, but no indication yet of any significant reduction in iron ore imports. The Chinese are good at always keeping us guessing. One important thing to point out: even if shortterm sentiment is a bit iffy, medium-term sentiment is really good considering the period activity we’ve been seeing. Interesting side note: for the most part, there’s a general consensus that dry bulk rates will trend sideways / fall for the Olympics, then rebounded significantly in the fourth quarter and approach record freight levels by the end of the year. ~http://files.irwebpage.com/reports/shipping/08l26Pvi9u/ImarexJuly25.pdf

Be careful out there. And remember, don’t assume what seems the most logical, or what you want to believe, to be reality. The biggest risk is not knowing, so do your research.

Referenced SuckingLess.com Research Tool:

** Disclosure: no positions in the stocks mentioned **

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