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XMFSinchiruna (26.50)

Did China Just End the Commodity Bust?



September 11, 2012 – Comments (2) | RELATED TICKERS: BTU , CAT , TECK

China's $150 billion stimulus package announced last week is merely a drop in the bucket. Adding in proposed public investment by several major cities, the tally could reach toward the $1 trillion mark. $1 trillion in infrastructure-focused public investment translates into a whole lot of every key commodity. 4 years ago, the U.S. stimulus package was little more than a glorified road-paving program compared to China's $586 billion build-out that did in fact alter the global baseline for commodity demand for roughly three years to follow. Some version of that is set to begin anew, and I think Fools may want to be aboard with carefully selected vehicles across a number of key commodities. There's a big steel inventory to work through, and likely some sizeable stockpiles of met coal and iron ore to boot, so hard to tell precisely when we'll see an impact on those prices, but I think that impact will be felt. The ensuing base-metal reversal will be a big help to poly-metallic silver producers as well as copper/gold producers.

And in the big picture, we still have $2 trillion in infrastructure investments that need to be made in this country since our crumbling infrastructure can only be ignored for so long. Brazil and India likewise present powerful catalysts for long-term commodity demand based upoin ther respective infrastructure needs. Global competitive currency devaluation bodes well for nominal commodity price escalation regardless of economic activity, and the likelihood of widespread stimulus programs to coincide with monetary policy interventions renders the commodity patch at present, in my view, at one of the lowest-downside-risk moments of the past several years.

Thanks for reading, and for sharing your thoughts.

2 Comments – Post Your Own

#1) On September 11, 2012 at 10:37 AM, Melaschasm (71.33) wrote:

With China's stimulus likely coinciding with the US recovery, this does present an interesting opportunity for commodity price increases.  The one limitation I see is the possible tightening of US monetary policy should growth and inflation both start.  I think we are still a couple years from significant interest rate increases by the Fed, but it can be difficult to predict.

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#2) On September 11, 2012 at 5:45 PM, SN3165 (< 20) wrote:

I am buying Jan '14 options on several coal producers such as Peabody and Walter Energy as a spec play on potential rebound in met coal prices in 2013

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