More on China’s Commodity Spending Spree

Wednesday, August 19, 2009 1:52
Posted in category Uncategorized

A quick follow up to my post last week  China’s Raw Materials Markets Send Prices Soaring where I took a brief look at the underlying China dynamics that could be catalyzing their purchases of commodities. It is an issue that I have yet o see anything definitive in terms of what the primary drivers have been, however the recent Human Events article China Makes Real Energy Moves had a few lines that I thought were interesting and worth delving into a bit more

Chinese oil companies, the press and international business newspapers are rife with stories and discussions about blockbuster international oil and gas deals to take advantage of “the relatively low prices of overseas assets” as a senior company executive was quoted by China Daily on August 12.

and

It is certain that with a huge surplus in foreign currency, large Chinese oil acquisitions will become commonplace. The likely next target will be in Venezuela, where an eager Hugo Chávez is waiting, and in the periphery of Russia, in particular Kazakhstan and Turkmenistan.

Almost overnight, the United States and the European Union will be reduced to mere bystanders while China moves into the big geopolitical leagues.

To be clear, it is clear to me that this is a political prode that has been sent from the furthest reaches of the right towards the political left, however in the grand context of things the point does need to be made that China’s surpluses are going to go a long way to solidifying some real cost advantages going forward. That, through these purchases, and stockpiling of cheap assets, China will be able to reduce its costs of manufacturing (or at the minimum hold the current cost) longer than anyone else in the US and EU who will have to (because of their poor cash positions) be unable to take advantage of this dip and will more than likely have to borrow once they re-enter the market.

Commercially where this is important is that these moves will allow buyers (Wal-Mart, Sony, and Home Depot) to continue enjoying cost advantages in China, advantages that cannot be found in the US, Mexico, or Vietnam as their cash positions will not allow for stocking.

It is in a sense, the global commodity version of high stakes poker and the US is sitting at the table short stacked.

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