China's Latest $3 Billion Purchase

Since Sarah Palin can see Russia from her front porch, perhaps she'd be kind enough to keep an eye on China as well. With all the lingering skepticism surrounding China's stated commitment to stimulating domestic growth, it's time the world realizes that China is serious about doing so.

Following a brief rally, the base metal markets scoffed at China's plan, announced earlier this week, to purchase 1 million tonnes of base metals for about $3 billion. Even after the World Bank lent credence to China's massive stimulus plan in its latest report, and despite the news of oil producer CNOOC's (NYSE: CEO  ) $29 billion development package for drilling in the South China Sea, the markets have adopted a wait-and-see posture with respect to China's ability to stoke commodity demand.

China's proposed purchase can likely be sourced entirely from within its borders, meaning the announcement may have little immediate impact for miners like BHP Billiton (NYSE: BHP  ) or Rio Tinto (NYSE: RTP  ) . At only 4% of China's annual copper production, the 150,000-tonne copper purchase is not about to prompt Freeport-McMoRan (NYSE: FCX  ) to reverse its production cuts, nor has it yielded near-term relief for Southern Copper (NYSE: PCU  ) . Aluminum Corporation of China (NYSE: ACH  ) , though, could see a boost from the 300,000 tonnes of aluminum in the proposed purchase. Meanwhile, I believe that the broader significance of this announcement has been widely overlooked.

At 100,000 tons, the proposed purchase of tin represents a full year's production in China. China's tin industry is enormous, featuring several of the world's top 10 tin-producing companies. Where metals analysts perceive a gesture that's unlikely to reach fruition, I see a country moving to maintain productive capacity, to fuel the impending infrastructure build-out of a $586 billion stimulus plan

While some may interpret this metals purchase as a bailout for a foundering industry, I see a nation prudently amassing resources at unexpectedly low prices in order to enhance the efficiency of its infrastructure expenditures. Where some may perceive a fruitless buildup of metal stockpiles, I see one of the world's most powerful economies acquiring hard assets to help offset its world-leading exposure to the rapidly accelerating debt of the United States. Finally, I believe more such purchases are likely to follow, and that eventually, the impacts upon base metal prices will be longer-lasting.

Further Foolishness on China:

If you believe that China will be a keystone to recovery for countless companies with exposure there, then consider taking the Motley Fool Global Gains newsletter service for a test-drive for 30 days. The Global Gains team watches China carefully as part of its search for exciting and Foolish investment opportunities around the globe. CNOOC is a Motley Fool Global Gains recommendation.

Fool contributor Christopher Barker is pretty good baker, because he can see a bakery from his front porch. He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Aluminum Corporation of China, BHP Billiton, CNOOC, and Freeport-McMoRan. The Motley Fool has a disclosure policy.


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  • Report this Comment On December 05, 2008, at 6:03 PM, KSaranac wrote:

    Hello Christopher. I worked in Nonferrous Metals Exploration, Mining, Mettalurgy and Marketing for 25 years and believe your comments are sound, and concur. Regards KSaranac73

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