JPM:"The World is Short Commodities, China is Not"

 https://www.zerohedge.com/news/2022-02-19/jpmthe-world-short-commodities-china-not

Authored by GoldFix Substack

That is how the JPMorgan Market Watch Commodity section of their most recent 88 page report to clients starts. The bank notes there are approximately 48 days of consumption remaining in global commodity inventories worldwide above ground. That is lower by 18% since the Pandemic peak in April 2020. It is also a 5 year low.

That drop in inventory over the last 10 months has driven the Bloomberg Commodity Index (BCOM) to rally some 85% to a multi-year high made back in 2015.

We Need China to Sell

China holds a large percentage of above-ground resources available for use right now. According to the bank’s sources, China holds approximately “84% of Global copper, 70% of corn, 51% of wheat, 26% of crude oil”, as well as large percentages of soybeans and aluminum.

When putting that inventory back in the mix, it adds another 14 days of current above-ground stock putting the world at 62 days of consumption. Even if the Chinese inventory were made available on global markets, it would not do much given the reduced expected deliveries from supply-chain issues and reduced fossil fuel exploration.

JPMorgan holds a constructive outlook for commodities from this in combination with the demand side of the equation being at record levels still. They do note early signs of a slowing in the aggressive drawdown of Global inventories just starting. We hope that becomes a bigger trend. Here’s why.

But China May Still Be Buying

China has just begun reflating its economy to offset the Evergrande disaster. Their monetary and fiscal policies will be much easier than last year. While the West is hiking rates to slow consumption, China will be counter-cyclical and be in a position to buy even more, or sell even less.

On January 21st we did a Podcast-post on this very topic entitled: China and the USA: The Next 50 Years in 3 minutes In it we quoted a tweet by Zerohedge that kind of cemented the debate in our minds who would “win” in this new monetary environment.

China has launched a new round of increasingly aggressive easing to avoid property collapse/GDP contraction. Fed will soon tighten. The two can't diverge for long or there will be major crisis... so how do they converge. If you said Fed will follow China, you are right- Source

This was before the Ukraine/Russian crisis which makes it even harder for the Fed to raise rates.

Geometric Price Spikes?

We believe the risk of a good old-fashioned short squeeze by China on the world is possible. In past years when our economies were opposite, the West could more easily dictate price. But with waning western consumption, rate hikes coming, and China a smaller creditor to the US than in years past; they are in a position to reap that trade more than ever. If nothing else, recent Russian gamesmanship in European Natural Gas has demonstrated a vulnerability in that regard.

Technicians note that if commodity prices stabilize just above here, the index has clear sailing potential to reach highs made in 2011. That could put food and energy prices another 60% higher. This would be even with a western economic slowdown from reduced consumption and higher rates.

What could that mean? Morgan thinks the risk of geometric price spikes is real:

Historic inventory tightness means there are few shock absorbers to cope with any unexpected interruption in output or stronger-than-anticipated growth in consumption, which could result in nonlinear price increases.

Unexpected interruptions like European wars, and locked down Chinese ports maybe?

But They Ain’t The Best Oil Traders

There is one thing that gives us hope. In 2008 Oil had that meteoric rise which coincided with the Summer Olympics in Beijing.

Back then BNP Analysts said:

"In the lead-up to the Games you are going to see pretty heavy spending in infrastructure - building roads, residential property, hotels - and this is typically energy intensive," said BNP Paribas analyst Harry Tchilinguirian.

What happened right after that rise?

Let’s hope the Chinese are still horrible tactical traders. Once the Beijing Winter Olympics are done maybe China will have bought the top again.  If they haven't  it will be a long hot stagflation-y summer for 2022.