How Will China's State Reserve Bureau's Nickel Bum-Rush Affect Prices?

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News that China’s State Reserves Bureau has been buying nickel has got the market excited.

According to an FT article, China’s State Reserves Bureau has covertly bought about 30,000 metric tons of nickel, equivalent to one-sixth of the stocks in London Metal Exchange (LME) warehouses, in recent months.

Unlike purchases of aluminum and zinc made from domestic sources in the past year, intended to aid struggling local producers, these nickel imports are said to be the first since the international buying spree the SRB went on in the aftermath of the 2008/2009 financial collapse.

In 2009, the SRB’s buying helped put a floor under metal prices, kicking off a bull run in prices than ran for two years until prices peaked in 2011. Since hitting a peak in 2011, the price of nickel has fallen 50% to hit its lowest level in nearly four years at $14,600.

This raises some major questions.

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Indeed, copper, nickel and aluminum have all touched their lowest levels in years last month – in part, it has to be said, as a result of worries about slowing growth in China.

It raises the question: is this judicious buying on the part of the super-canny SRB prescient of a probable rise in prices later this year or next?

Or is it simply the SRB doing its job and rebuilding a depleted stockpile at a time when prices have fallen sufficiently that they present fair value?

SRB to Buy Copper?

The article reports rumors that the State Reserves Bureau is also seeking to buy as much as 200,000-300,000 metric tons of copper; although copper prices have also fallen this year, they still remain at more than double their 2008 lows.

At the end of the day, second-guessing the SRB may not be the point, as one senior metals trader quoted by the FT said: “If you had bought copper every time the SRB bought copper you would have made a fortune.”

The very fact they are buying could be enough to spark a revival in prices, providing it is followed through across a range of metals in a manner similar, if not on the same scale, as 2009.

The fundamentals do not support a strong rally in prices – but investors aren’t always mindful of fundamentals, preferring sentiment and the next big thing. Traditionally very secretive unless they are specifically trying to move the market, the SRB usually buys covertly, preferring not to advertise its intentions before its buying is complete, for obvious reasons.

Keeping a close eye on reports of their activities may give some indication of a price driver that has been absent in recent years, should it spread across the metals complex.

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