Metals Stockpiled by China's Pig Farmers May Be Sold

SHANGHAI, Aug. 19 -- Metal inventories held by speculative Chinese investors including pig farmers may be dumped when "market sentiment turns," said Scotia Capital Inc.

    A price surge and easy bank credit this year encouraged pig farmers, stock brokers and businessmen to stockpile copper and nickel for speculation, Na Liu, an analyst with Scotia Capital, wrote in an e-mailed report dated Aug. 17, citing reports from the state-owned China Central Television.

    "These stockpiles are in 'weak hands' as speculators have no real use for base metals," Liu wrote. "When the market sentiment turns, they are very likely to turn into quick sellers, especially when the bank's money is involved."

    Metal prices, which have surged 66 percent this year, are looking "frothy" and increasing stockpiles are threatening the rally, Goldman Sachs JBWere Pty. said this month. Copper, aluminum and other metals shipments to China soared to a record this year as expanding loans and the government's 4 trillion yuan ($585 billion) stimulus program boosted demand and prices.

    "Some of the stored metals are already flowing into the market as those investors think they've earned enough," Deng Limin, a trader at Eramet SA, said by phone from Shanghai. Paris-based Eramet runs the world's biggest ferronickel plant.

    Copper futures in London are down 2.3 percent this week. Shanghai exchange-monitored copper stockpiles expanded to 76,107 tons last week, the highest in two years.

    Speculative Behaviors

    China, the world's largest metal consumer, uses around 5 million tons of copper and 400,000 tons of nickel a year.

    "The scale of the speculative investment is hard to quantify, although some local observers put the number at some 200,000 tons for copper, and at 50,000 tons for nickel," Scotia's Liu wrote. "We regard these speculative behaviors as natural, and they will inevitably occur in a bull market, so we do not want to exaggerate the impact they have."

    Pig farmers in Guangzhou were buying copper or nickel, Liu wrote, citing the state television. Residents in Wenzhou city of Zhejiang province, "famously investment savvy," are reportedly using bank loans to stockpile copper scraps, with one merchant saying he has stored 20,000 tons, Liu wrote.

    Housewives in Wenzhou may also have engaged in stockpiling because "they just have too much cash on hand," Eramet's Deng said.

    The People's Bank of China scrapped lending quotas in November, triggering a record 7.73 trillion yuan of new loans this year. M2, the broadest measure of money supply, rose 28.4 percent in July from a year earlier.

    Metal traders have reported incidents when "a rich man walked into our office and asked us what had been the lowest and highest prices of nickel," Scotia's Liu wrote. "After telling him those prices, he said the current price was low and he placed an order."

    Scotia Capital is a unit of Toronto-based Bank of Nova Scotia.

    (Source: Bloomberg)