According to official data, the Chinese
is cooling a bit, with 2012 growth projected to come in around 7%
or 8% -- a multi-year low.
Don't you believe it.
Statistics provided by the Chinese government are strictly a
form of propaganda, used to influence global markets and quell
domestic social unrest. According to many economists that work
outside of the government, the Chinese economy is growing at a much
slower pace, a result of sharply-falling exports and manufacturing
How do we know this? Because
prices have been slumping badly, and China's insatiable demand for
raw materials is now the single-biggest factor in commodity
Consider these stats:
- Copper prices have fallen to a recent $3.40 from $4.50 per
pound last summer.
- Crude oil prices have dropped 15% in just one month.
- Iron ore prices have fallen nearly 10% in the past month as
China decided to forego bidding on recent
Yet here's the good news for commodity investors: China's
leaders tend to panic in the face of any major slowdown for fear
that social troubles will bubble up. Back in 2008, they launched a
half-trillion dollar stimulus plan to jumpstart the economy, and
the efforts are now seen as a key factor behind China's ability to
keep growing even as the economies of key trading partners fell
Chinese leaders are taking action again. In recent months,
through the country's National Development and ReformCommission
(NDRC), a rising number of massive projects are getting the green
light, from steel mills to housing to wind turbines. Roughly
200 projects are typically announced by the NDRC each month. That
figure moved 20% higher in March, April and May.
"Infrastructure investment will be the de facto key policy tool
in the next few months, which supports our forecast for a rebound
in growth in H2," analysts at Societe Generale recently noted. And
China's increase in projects should set the stage for an eventual
rebound in economic activity -- and commodity prices.
In addition the rising tide of projects, here's what else the
Chinese government has done in just the last 30 days:
- Cut the required reserve ratio for banks by 50 basis
- Provided several billions of dollars in subsidies to buy more
energy-efficient home appliances.
- Streamlined regulations to boost investment in highways,
medical institutions, railway projects and the banking
A tilt toward consumerism
Even as the government applies a jolt to the economy, it's fair to
wonder whether China can avoid a deep slump while Europe -- its
leading trade partner -- is in such a funk. Yet the nature of
China's economy is shifting from a pure export focus to more
balanced one that relies on more domestic demand. And an
increasingly affluent (and growing) Chinese middle class will
likely lead to more demand for everything from houses to jewelry to
cars -- all of which should help commodity prices in one way or
another in the long-term.
Waiting forthe Fed
Looking beyond China, there is another, perhaps more powerful
reason to anticipate a rebound for commodities prices. A number of
economists say the U.S. economy will likely slow down in coming
months, in large part due to the paralysis associated with Europe
and our own year-end looming tax battles. They add that the Federal
Reserve stands ready to support the economy through another
injection of liquidity into
markets -- known as QE3. The prior two programs of quantitative
easing gave a solid boost to commodity prices for a very
straightforward reason: the added liquidity injected into the
economy leads to a search for more speculative assets, such as
gold, oil, copper and even stocks -- rather than low-interest
In effect, China and the United States are already -- or soon
will be -- taking steps to boost their economies. This doesn't
commodity prices have hit bottom right now and will soon turn up.
Yet it does mean that the factors behind the recent commodity
sell-off will eventually reverse.
The ways to play
I remain a big fan of
, both of which are in my
$100,000 Real-Money Portfolio
. Though copper prices have been weakening, it's important to note
that the copper
is expected to remain under-supplied this year. Aluminum
prices are already so low --at a recent ninety cents per pound --
that high-cost processing plants are slowly being taken off-line,
which should eventually lead to firming prices.
Beyond these two stocks, there are other bargains emerging in
the commodity space. For example, Brazilian mining firm
has shed roughly $75 billion in
in the past year, and trades for just 5.5 times (depressed) 2012
, the world's largest steel maker, has seen its stock fall 86% to a
recent $14, from $100 back in 2008.
Risks to Consider:
All of these stocks carry the risk that the global
economy in general -- and China in particular -- comes in for a
. These commodity and share prices are already beginning to reflect
such a dire outcome.
Action to Take -->
I still prefer Alcoa and Freeport-McMoRan because their
balance sheets provide more of a backstop, though ArcelorMittal and
other commodity stocks might have even more upside when sentiments
toward commodities reverse. Either way, you should be looking to
add exposure to these stocks in your portfolio soon.
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-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC owns
shares of FCX, AA in one or more if its "real money"
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