What Do Chinese Farmers Have to do with the Price of Copper?

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"The new breed of base metals speculator is cause for concern. . ."

Forget the sluggish U.S. economy. The biggest threat to the stunning rebound in base metal prices could come from Chinese pig farmers.

Easy access to credit from Chinese banks has apparently inspired hog producers in Guangzhou province, investing-astute citizens in Zhejiang province and residents of the northern scrap metal trading hub of Anxin county to speculate on the price of copper and nickel.

Regular Chinese citizens are mimicking the government's decision to aggressively stockpile metal supplies amid the global economic crisis.

According to a recent report by China Central Television (CCTV), residents in rural areas have been accumulating physical copper in recent months, in quantities ranging from a few tons to a few hundred tons.

The new breed of base metals speculator is cause for concern, according to commodity experts. Na Liu, China strategist at Scotia Capital in Toronto, said local observers estimate that the non-institutional Chinese speculators could account for stockpiling of some 200,000 tons of copper and 50,000 tons of nickel.

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

China's $586-billion economic stimulus package, which is designed to spur spending on infrastructure, coupled with liberal lending policies by domestic financial institutions at Beijing's behest, has prompted massive buying of base metals, particularly copper.

Desjardins Securities analyst John Hughes said the market has, for months, been trying to figure out how to account for all the copper being imported by China. Even if the citizen speculators are a big driver of copper demand, Mr. Hughes expects that China's growing industrial economy will easily be able to absorb a surge in selling by the speculators.

"Any speculative investment in that commodity is ultimately going to be sold into the domestic market so we do not believe we are going to see any material [copper] exports back into the West," he said.

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