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Get the Best Bang for Your Yuan

By Christopher Barker - Updated Apr 5, 2017 at 7:53PM

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China throws a lifeline to aluminum smelters with a major metals purchase.

While Fools conscientiously realign their spending habits with a new economic reality, the Federal Reserve is busy printing dollars and finding new ways to spend them. Meanwhile, across the Pacific, China continues to follow an investment strategy that appears substantially more frugal.

Providing further evidence of a serious commitment to sustain the nation's vast industrial complex, China announced late last week that the State Reserves Bureau will purchase about 300,000 metric tons of aluminum in January. At about a 10% premium to spot aluminum prices, the $540 million purchase will help struggling Chinese smelters to endure this period of weakened demand without resorting to even deeper cuts to productive capacity.

About half of the total will be purchased from Aluminum Corp. of China (NYSE:ACH), which sliced production by 720,000 metric tons annually as about 20% of China's total aluminum capacity has been idled. With plans to acquire another 700,000 metric tons after this purchase, China is not only obtaining substantial aluminum inventory at prices that could scarcely have been imagined just a short time ago, but also injecting demand to help stem the relentless slide in aluminum prices. Although smelting remains a borderline proposition at these prices, these purchases help to build a foundation for eventual recovery.

The reserves bureau also voiced its intention to purchase 300,000 metric tons of zinc next year. No figures were released concerning copper, but an industry group advising the board suggested a purchase of 400,000 metric tons of copper in 2009. Adding the previous commitment by China's Yunnan Province to purchase 1 million metric tons of various metals, I believe the scope of these purchases collectively will prove far more productive than many analysts concede now. For struggling miners like Teck Cominco (NYSE:TCK) and Rio Tinto (NYSE:RTP), the potential price support could hardly come too soon.

Given some compelling clues emanating from steelmakers like POSCO (NYSE:PKX) and China's Baosteel Group, the specter of a declining U.S. dollar, and the swiftness of worldwide production cuts from mining giants like Freeport-McMoRan (NYSE:FCX) and Vale (NYSE:RIO), I continue to sense a recovery in commodity prices in the medium term, and I continue to look to China for confirmation. With these metal purchases from China for the largest infrastructure build-out in modern history, I believe Fools will get more bang for their bucks by investing where China is investing its yuan --in aluminum, copper, and zinc. 

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Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
FCX
$30.29 (-1.59%) $0.49
POSCO Stock Quote
POSCO
PKX
$44.91 (-2.48%) $-1.14
Rio Tinto plc Stock Quote
Rio Tinto plc
RIO
$62.93 (-0.52%) $0.33
Teck Resources Limited Stock Quote
Teck Resources Limited
TECK
$31.65 (-4.73%) $-1.57
Aluminum Corporation of China Limited Stock Quote
Aluminum Corporation of China Limited
ACH
$9.59 (-2.44%) $0.24

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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