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What Do China's Aluminum Sales Mean?

China has started (slowly) selling its considerable stockpiles of base metals.

The National Development and Reform Commission announced this week it sold just under 96,000 tons of aluminum through public auctions on November 1 and 2.

This comes a week after China announced sales of stockpiled zinc.

The sales are somewhat of a "coming full circle" in base metals. Recall that in the wake of the 2008 financial crisis, Chinese state buying was one of the main factors that bailed out then-depressed base metals prices.

On the back of this initial boost, prices have roared back over the past year. Driven by inventory re-building earlier in 2010. And lately by growing speculative buying (Morgan Stanley said this week that zinc and aluminum should be considered "ideal candidates" for new exchange-traded fund products).

The interesting thing is why China chose to buy metals in the first place.

At the time there was a lot of speculation that China was simply grabbing all the metal it could in order to meet future demand. But the deeper story was a little more complex.

In fact, much of the buying was aimed at bailing out China's domestic metals producers. Many Chinese producers run relatively high production costs. And with prices down after the crash, these businesses were faced with losses and shut-downs.

Instead of seeing widespread unemployment in the sector, Beijing intervened. Buying metal and raising prices to the point where domestic operations could stay in business.
The plan worked. But China isn't betting on high prices sticking around forever.

Instead, the government has been taking steps to lower production costs across its metals industry. Mostly by consolidating smaller operations and achieving cost savings through economies of scale.

Look at coal. Just this week, China's National Energy Administration said it will seek to consolidate the coal industry into just ten companies with annual production of 100 million tons each, plus ten "mid-tiers" producing 50 million tons annually, by 2015.

Other sectors are being similarly streamlined. Meaning that production costs will come down. Meaning that metals prices will not need to be as high in order to keep output coming.

With these tweaks now in process, is Beijing gaining confidence to unload some of its metals holdings?

By. Dave Forest of Notela Resources




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