pursuits

As China Weighs Metal Stockpiles, History Shows It's No Panacea

  • China was successful in buying copper during financial crisis
  • Countries haven’t done as well hoarding other commodities

Every time China considers stockpiling a commodity, the market jumps -- at least at first. Longer-term, the record for state intervention in metal and agricultural markets is mixed.

Industrial metals rallied Thursday, with copper gaining the most in almost seven weeks, as authorities were said to be weighing state purchases to support prices near the lowest in years.

The reaction reflects the success that China’s State Reserve Bureau had in lifting copper prices during the global financial crisis, wrong-footing seasoned traders. The SRB stepped up metals purchases after copper collapsed in 2008 before more than tripling to a record in 2011. The bureau doesn’t disclose how much and when it buys, something that generates a lot of market gossip, said Leon Westgate, an analyst at ICBC Standard Bank Plc.

That SRB victory, however, masks multiple failures by China and other nations to support tin to cotton markets through building inventories.

"It is distorting natural market forces,” said Caroline Bain, a commodities economist at Capital Economics Ltd. in London. “Looking back at the history, it hasn’t always ended disastrously but it hasn’t always been very effective either.”

Here are some examples of attempts to lift prices that ended badly:

Tin

Since the International Tin Council’s founding in 1953, the group of producing countries had been buying the metal to support prices. In October 1985, with debts of more than $1 billion, the council collapsed, forcing it to offload the hoard. Prices fell from $12,400 a ton in 1985 to $5,300 by the middle of the following year. The London Metal Exchange suspended its tin contract from 1985 to 1989 as a consequence.

“Tin-producing firms around the world watched with horror the price of tin plummet," Ian Mallory wrote in his study ‘Conduct Unbecoming: The Collapse of the International Tin Agreement.’

Rice

In October 2011, the Thai government started buying rice from the country’s farmers. Two years later, the mountain of stocks had reached almost 13 million tons. That was more than the nation’s annual exports, according to the U.S. Department of Agriculture.

The new Thai government started selling much of the pile in late 2014, some of it as animal feed after the grain rotted. Thai benchmark rice prices, which had risen briefly from $500 a ton to more than $600 in 2011, slumped to a six-year low of $360 by mid-2015.

Cotton

China started buying large amounts of domestic cotton in 2010, often through the state-owned China National Cotton Reserves Corp., on concern that supply eventually wouldn’t be able to feed its textile industry. The inventories reached a point that traders said would allow the nation to meet its needs for six years without relying on imports. The purchases -- and later sales -- helped prices surge in New York to a record in 2011 before slumping as much as 71 percent by mid-2012.

Palladium

The Soviet Union amassed large amounts of palladium during the 1970s and 1980s in an effort to support local producers through higher prices. After the Cold War, Russia began selling the reserves to raise cash, while higher prices spurred carmakers to cut consumption of the metal used to reduce harmful vehicle emissions. Palladium, which reached a record $1,125 an ounce in 2001, plunged as much as 87 percent through 2003.

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