China’s 470 million ton demand for steel is considerably lower than the country’s annual production capacity of 660 million tons, and to that effect, China announced a three-year ban on new mills The New York Times reported.

“Disorderly competition” has pushed up iron ore prices, caused a glut of production capacity and resulted in “serious losses,” said China’s Information Minister Li Yizhong. “My ministry will not approve any expansion-related projects in the iron and steel industry. I would like to call on the whole industry, all iron and steel producers, not to construct any new projects within three years.”

China is using its clout as the world’s largest steel producer to negotiate lower iron ore prices with some of the larger ore producers, but six weeks after the last agreements expired at the end of June talks are still deadlocked.

Beijing is showing it can and will shop around for the best prices it can find, inking an iron ore deal Monday with Fortescue Metals Group Ltd. that gives the Red Dragon prices 3% below a benchmark set by Rio Tinto with Japanese, Korean and Taiwanese steelmakers.

Still, the Fortescue contract covers only 18 million metric tons of ore, compared to the tens of millions of metric tons Rio Tinto and BHP Billiton Ltd. (NYSE ADR: BHP) have earmarked for the second half of this year.

“The price Fortescue is getting should not be taken as indicative of what Rio and BHP will get,” H3 Global Advisors Director of Commodities Funds Manager Mathew Kaleel told Reuters. “In terms of volume there’s no comparison”

Rio Tinto agreed with Japanese and South Korean steel mills to cut prices by 33%, but negotiations with China stalled when the China Iron & Steel Association demanded a deeper price cut. China is still receiving iron ore on long-term contracts with provisional pricing terms based on the 33% cut, Rio Tinto Chief Executive Officer Tom Albanese said yesterday in a conference call.

It may be difficult for Rio Tinto to bend too far on pricing, as the company saw its profit drop to $2.5 billion in the first half. Operating income at Rio’s iron ore division, its biggest profit generator, fell to $1.9 billion in the first six months of the year.

Chinese iron ore imports rose to their highest level ever as prices swooned in July.

Source: China Turning the Screws on Rio Tinto in Iron Ore Negotiations

Good day… And a Marvelous Monday to you! A great weekend that was filled with watching my little buddy, Alex, play football, hosting a surprise 30th birthday party for my little girl, Dawn, and a sweep of the Padres by the Cardinals! This week gets cut short with me a the helm, as I head to San Francisco on Thursday. Chris will have the conn on the Pfennig Thursday through Monday.

Well… Who’d a thunk it? Yes, who would have thought that the U. of Michigan Consumer Confidence could turn the markets upside down and spoil the party? Well… It happened on Friday! The U. of Michigan Confidence Survey for Aug unexpectedly dropped to 63.2, from the previous month’s 66 level. The real drop though was from the forecast for this month which was 69! The drop brought the index to a five-month low.

CPI printed at 0%, Industrial Production rose and so did Capacity Utilization in July… But none of it could get the taste of the U. of Michigan Consumer Confidence out of the markets mouths. It was the Humpty Dumpty economy once again… All the king’s men couldn’t erase the drop of Consumer Confidence.

And, the return of the risk aversion campers swamped the markets. And all day Friday, we saw losses in value of stocks, commodities and currencies. In the overnight markets, the return of risk aversion got even stronger. From what I understand happened, it seems that China’s largest steel makers announced that they were going to se iron ore prices at 35% below the benchmark. This sent shockwaves through the commodities, and that has carried over to further losses in the currencies…

The euro has just fallen through the 1.41 handle, and is taking all the other currencies with it to the woodshed… That is, except of course, Japanese yen. I’ve gone through this so many times in the past, I think you all know exactly what I’m going to say, before I say it… But, for those of you new to class, when the risk aversion crowds fill the markets, investors head for the hills, thus selling their “risk assets” of which currencies are a part of. However, there are two currencies that the mental giants believe to be “safe havens”… One pick is ridiculous, and the other one is even more ridiculous as “safe havens”… But you can’t fight the markets, and they deem Japanese yen and U.S. dollars as “safe havens”… Me? Personally? I deem one to be a currency that should be circling the bowl! And the other? It’s iffy for sure… I don’t think you need me to tell you which one is which!

Of course, the Japanese yen has its moments… And one of those came last night in the form of their 2nd QTR GDP. The Japanese economy grew 3.7% in the 2nd QTR, thus ending their recession… But just like the Australian economy that we talked about last week, and needing to see if it can maintain this growth after the removal of “fiscal candy”, the same is true for Japan. But Hey! 3.7% growth is still pretty impressive, for Japan!

This morning, as I look over the headlines on the Bloomie, I see one story that says the euro will fall to 1.30 VS the dollar, and two other stories that say the opposite, with one saying it will reach 1.45 in the coming days, and the other saying the euro is a “buying opportunity”… Confused? Well, that’s the stuff that markets are made of folks… People with differing opinions…

Which brings me to what I will call “Pfennig etiquette” Just because you have a “different opinion” on things that I say, does not give you the right to flood my email box with what you believe is proof that you are correct! Nor does it give you the right to get nasty with me… It’s this simple folks… If something is on TV that offends you, what do you do? You change the channel… Carry that over to your FREE subscription to the Pfennig…

OK… Enough of that! Later this morning we’ll see German Trade Balance numbers, and… The June TIC Flows data from the U.S. These TIC flows just don’t get the attention I believe they should. So, I carry on despite the mental giants in the markets that place importance on data prints! TIC Flows are simply, the net security purchases by foreigners. The U.S. has to sell its Treasuries to finance the ever expanding deficit… And supposedly, these TIC Flows tell us whether that’s happening or not. But given the games that people (the Fed and Treasury) play these days, who knows what is real or not? Only the shadow knows!

Don’t ask Big Ben Bernanke, he’ll tell you he doesn’t know, like he did when he was asked by a Senator where $500 Billion that left the Fed’s books went… Big Ben said… “I don’t know”… Ahem… Big Ben? IF YOU DON’T KNOW… WHO THE )*&(&*)( SHOULD WE ASK?

OK, that was a tangent I didn’t plan on going to… But I did… So let’s finish the TIC Flows talk, eh Chuck? So… Last month, for instance, the data showed a negative figure, which meant that we did NOT finance our deficit in May! June’s data prints today… Let’s hope it prints better than the May report!

Speaking of the cartel, I mean the Fed Reserve… I saw this quote by Bill Bonner the other day, and just knew it would fit nicely in with any discussion of the cartel, I mean the Fed, and Big Ben Bernanke… Here’s Bill… “And remember, too, the feds don’t really have any money to hand out. They can only get money by taking it from its rightful owners – either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy…twists it…misleads it…and makes it a bigger mess than it was already.”

Yes, that’s exactly right, Bill! And something that I’ve tried to tell my dear readers for some time now… A lot of people don’t agree with that… And that’s all fine and dandy with me… But I believe that the things that I’ve researched tells me otherwise… Quite a bit otherwise!

All the good that the Norwegian krone built up last week, has been wiped out by the sell off of Oil prices. And when the Norwegian krone backs off it takes the Swedish version of the crown the krona with it!

The Aussie and kiwi versions of dollars saw their recent lofty levels melt away with the commodities damage from the Chinese steelmakers announcement. These two are still way above their winter of this year’s levels, so, it’s not all bad…

So… These risk aversion outbreaks have been relatively short in recent months, and not like the risk aversion of last fall and winter… So, we can look to see what might shake the risk aversion campers… As I look over the data calendar for this week, I really don’t see anything that “might” scare the risk aversion campers… However, the week is dominated by several reports on Housing & Building… Maybe, just maybe, these reports might show that the Housing market has bottomed, that sales are picking up, and that home prices have stopped falling…. Who knows? Maybe that would be enough to shake up the risk aversion campers!

I was thinking about this while I was typing that previous paragraph… And that is… Even if Home prices show a bottom, how long will it be before they are on the upside of 2 years in the red? Unfortunately, it will be a very long time before that happens! Long Time readers will remember when I used to (what many believed me to be doing, crying wolf), warn about the housing bubble… Shoot, I had people in the mortgage industry that just wouldn’t / couldn’t come to agree with me… Of course when it all melted down eventually, they admitted to me that they had been drinking the kool-aid, but now see what I had been trying to tell them…

So… When I say that I believe it will be a very long time before that happens, I’ve got a track record here…

I also was one of the first people to say in 2001 that the dollar was about to go into a secular long term weak trend… You should have seen the emails I got then! Oh, but look at us now… The dollar index has given up over 40% of its value since then! And some individual currencies were doing even better at one point during the trend…

So, with that note… I’ll head to the Big Finish!

Currencies today 8/17/09: A$ .8175, kiwi .6665, C$ .90, euro 1.4065, sterling 1.63, Swiss .9250, rand 8.20, krone 6.20, SEK 7.32, forint 194.85, zloty 2.98, koruna 18.33, yen 94.50, sing 1.4520, HKD 7.7505, INR 48.96, China 6.8360, pesos 13.03, BRL 1.8475, dollar index 79.50, Oil $65.80, 10-yr 3.47%, Silver $14.18, and Gold… $936

That’s it for today… I hope your Monday is Marvelous!

Chuck Butler

Source: U. of Michigan Spoils the Party…

Assets like iron ore and copper would suddenly look bullish. Countries like Australia, Brazil and Canada would suddenly have brighter prospects. Asia as a whole would be more attractive to investors.

China’s voracious appetite for commodities drove the second-biggest monthly haul of crude oil and tripled aluminum imports, but very little steel, aluminum and coal went the other way.

“Industrial production is coming online and demand is rising. But sentiment may be tempered by the view that some of the material is being stockpiled and… consumption hasn’t risen as quickly as imports,” Ben Westmore, commodities economist at National Australia Bank, told Reuters.

Copper imports jumped 6.6% from March to April, to 399,833 tons; iron ore imports soared 9.4% to 57 million tons, and crude oil imports hit 3.93 million barrels per day, a 2% rise, customs data showed.

But China’s exports fell more sharply than most analysts had expected in April. The value of goods and services leaving the country was down 22.6% compared to last year, whereas economists had expected an 18% drop.

The drop in exports is leading some experts to speculate that China’s economy is being sustained solely by the $585 billion stimulus package the government is quickly deploying throughout the country. The stimulus program is heavily laden with infrastructure projects, explaining in part China’s huge demand for raw materials.

But some of that spending is spilling over into sales of construction equipment, much of it imported from the United States. Caterpillar Inc. (NYSE: CAT), the world’s largest maker of bulldozers and excavators, is among several companies already pointing an improvement in sales to China.

“March and April were pretty strong months for sales in China,” Caterpillar Chief Executive Officer James Owens said on an April 21 conference call with analysts.  Owens contends China’s stimulus spending for public works projects is working more quickly than in the U.S.

“When they say ’shovel ready,’ they mean nine weeks, not nine months,” he said.

Still, the drop in exports could put a chill on China’s imports of raw materials and construction products if consumption doesn’t pick up in the West.

“Although the downward trend is in line with our expectations the fall in exports is steeper than we anticipated,” Wang Xiaohui, an analyst at Sinolink Securities in Shaghai told Forbes.“Exports are likely to drop further in the near term as economic indicators in the United States and Europe, such as industrial output and retail sales, are not looking up.”

The U.S. trade gap with China increased to $15.6 billion from $14.2 billion from March to April. The gain in imports from China overshadowed an increase in Chinese demand for American-made goods that pushed U.S. exports to the highest level since October.

But the recent stock market surge and other economic data lead Wang to conclude that the lull in U.S. demand for China’s exports will be short-lived.

“In terms of exports, we’re looking at a better second half than first half, with the U.S economy stabilizing, which will provide support to China,” Wang said.

Source: China Imports Record Amounts of Copper and Iron Ore, but Exports Drop on Slack Global Demand

Brazil is certainly in this basket of falling markets. Fortunately for you, it shouldn’t be.

Sure, more than half of Brazil’s exports are commodities like soybeans and iron ore. But there’s a very good reason why Brazil is a safer investment than most — stability. Before you get started, let me explain…

Over the past two decades, Brazil has gone through many crises. Each one taught the country how to handle poor economic situations. But it was the most recent one that puts us in a tremendous advantage.

After so many years of falling on its face, Brazil elected President Luiz Inacio Lula da Silva. Leaving our opinions aside, Lula has done something to put the country in the driver’s seat this time around.

At the beginning of this decade, the world punished Brazil for its high debt levels. Its market crashed, erasing years of growth. Since this pseudo crisis, the Lula administration has stabilized the country’s economy and paid down debt. On top of these moves, it’s also put tough regulations in place across many industries. Most investors thought these regulations limited growth, which they did. But now investors – or, at least, smart ones – see the regulations as necessary evils.

By regulating industries like energy and finance, Brazil kept a steady, stable growth rate of about 4% in recent boom years. The rest of the emerging nations of the world were getting used to a 7% rate. These other “emergers” were funding their growth by leveraging their assets and creating massive debts. Brazil was paying its down, while accruing next to no new debt.

The overall stock market hasn’t noted this major difference, however. Brazil’s major index, the Bovespa, is down 40% over the last 12 months – alongside the rest of the world.

While others struggle with “bad assets” and massive debts, Brazil will be ready to strike.

Energy is our favorite way to play Brazil. Without energy, you can’t expand. Just look at what China is doing these days. As it continues to come online, it burns through more coal and oil than anyone could have imagined. Brazil, while it’s no China, is still demanding an enormous amount of energy.

The largest difference between Brazil and China is the regulations. There are many more aggressive mandates in the Brazilian energy industry than most Chinese, or Americans for that matter, can even fathom.

For instance, there’s been a lot of talk in recent years here in the U.S. about switching regular gasoline for ethanol to power our light vehicles. Brazil has been doing this since 1975. That’s over 30 years of mandates, which require all light vehicles to use at least 25% ethanol blends. The country is the world leader in ethanol efficiency. That came from strategic mandates.

The rest of the Brazil’s energy situation is no different. In recent years, hydroelectricity became the country’s energy solution. Now 80% of Brazil’s electricity comes from hydropower. This energy revolution places Brazil 42nd in CO2 emissions worldwide. It produces less CO2 than countries like Israel and the Philippines, which are just fractions of Brazil’s size and population.

Early investors in Brazil’s booming hydropower industry stand to make massive gains, while the rest of the world’s nations are trying to put their own economies back together. That’s where you need to be looking.

Source: Brazil’s Hydropower Advantage

Spot prices are way down for iron ore and nickel (which goes into iron ore production).

China has increased its iron ore imports over the past few weeks. And, as you can see from the chart below, nickel prices began rebounding at the end of last year.

The $586 billion construction stimulus program in China could be behind these recent trends.

But my Chinese sources say there’s a more mundane (and less hopeful) explanation. They say that China is buying more iron ore to take advantage of current low prices and build up inventories.

China’s economic growth is around 6.5-6.6 percent. It was 11-12 percent before it got caught up in the global economic slowdown. China has a long way to go to get economic growth anywhere near normal.

But I still think the first countries to rebound will come from the east and not from the west. It just won’t be soon.

Source: Basic Metals Not Ready for Primetime

Over the past few months, China has capitalized on the financial turmoil that has paralyzed the world’s “developed” economies by stocking up on cheap commodities, weeding out competition to its largest state-run companies, and acquiring even more foreign assets.

Indeed, with China’s economic growth projected at an enviable 8% for this year, that country’s government has been able to spend less time promoting immediate growth and liquidity, and more time preparing for the economic renaissance that almost certainly seems to be the Asian giant’s destiny.

By exposing Western free-market capitalism, undermining the United States economic clout, and eviscerating commodities prices, China is using the financial crisis as the perfect opportunity to advance its domestic agenda.

That agenda begins with the recently unveiled $586 billion stimulus plan – a plan primarily focused on infrastructure.

China’s financial institutions have little or no exposure to the toxic subprime assets that spawned this current global crisis. Thus, instead of having to spend hundreds of billions of dollars to bail out its banks, China can choose develop the stage on which it will display its future economic might.

And the first phase of that plan is key: Before its plans for a massive infrastructure overhaul can be realized, China must first load up on the raw materials crucial to its execution.

With Prices Down, China’s Stocking Up

Prices for commodities like aluminum, copper, iron ore and oil are all down substantially from last year as the global financial crisis has torpedoed demand. And now that prices have gone down, China’s commodities stockpiles are going up.

Imports of copper, iron ore, and oil all rose in December, as China took advantage of low commodities prices:

• Iron ore imports were up 6.2% in December, on a year-over-year basis.
• Copper imports were up 19.3%.
• And imports of crude oil climbed 11.6%.

“The authorities are thinking about the issue from a strategic point of view,” a senior researcher at China’s State Reserve Bureau (SRB) told Reuters. “As almost all raw material prices went sky-high in the last few years, China has not built up some of the key state reserves. Now is a much better time to stock up.”

The government announced last month that it would purchase of 290,000 metric tons of aluminum from eight of the nation’s largest smelters at about $1,806 a ton. And on Jan. 13, representatives from the SRB again met with domestic smelters, this time to discuss plans to build a stockpile of up to 300,000 tons of zinc – a metal used in galvanized steel.

A 300,000-ton zinc reserve could cost about $494 million (3.36 billion yuan), based on recent spot prices of $1,630-$1,640 a metric ton, as quoted on the Shanghai Nonferrous Metals Market.

Market participants speculate that the government is also mulling a 200,000-ton copper reserve, now that prices for that metal have tumbled more than 50% from a record $8,940 a metric ton last year.

“China will buy copper for its reserves,” SRB Executive Director and Vice President Wang Chiwei said at a conference in Shanghai.

Prices right now are “attractive,” Wang added, noting that purchases would “suit national interests.”

Chinese copper demand is expected to grow moderately in 2009, despite the global downturn.  Officials expect growth of just over 2% next year, but Barclays Capital (ADR: BCS) analyst Yingxi Yu told Forbes that demand growth could be closer to 3.5%.

The SRB may increase stockpiles of copper by as much as 74% in the next two years, Scotia Capital Inc. predicted in October.

China Digs for Bargains Down Under

Of course, China’s recent drive for raw materials is only half the story.

China is already home to the world’s largest population; now it is on the fast track to passing Japan as the world’s second-largest economy. Access to resources will continue to be a priority in Beijing for decades to come, even long after the $586 billion stimulus plan is forgotten.

That’s why China isn’t just using the global financial crisis as an opportunity to stock up on raw materials, it’s also loading up on foreign companies and assets while it is flush with foreign reserves. And while prices are cheap.

As they struggle with sluggish demand and falling commodities prices, many distressed foreign mining companies and materials suppliers have suddenly found themselves with a generous foreign backer.

In December, China’s third-largest zinc producer, Zhongjin, bought a 50.1% stake in Australian zinc miner Perilya Ltd. for $32 million.

Perilya has found “a strong and well-funded strategic partner committed to the long-term development of Perilya’s assets,” the Perth-based miner said in a statement. The deal included an initial cash deposit of $6.5 million.

Perilya’s deal followed that of Albidon Ltd., which started producing nickel in Zambia just as nickel prices crashed. Albidon raised $5 million from China’s Jinchuan Group, Asia’s largest nickel producer and a shareholder that now owns 18% of the West Perth-based Albidon. But more importantly, Jinchuan will take 100% of the nickel the Zambian mine produces over the rest of its life.

State-owned companies like Zhongjin and Jinchuan have access to China’s massive cache of foreign exchange reserves, which allows them to make acquisitions at a time when few other companies have the resources to facilitate a merger. And while China has focused much of its attention on undeveloped mining assets in Africa, the current financial crisis has opened the door to a wider range of takeover possibilities.

“The Chinese realize there are massive opportunities in the market,” Keith Spence, president of Global Mining Corp. (OTC: GBGD), told The Financial Times. “A year ago, they were going to Africa to acquire early-stage development assets. But now they are looking for larger tonnage, longer life, later-stage assets. There is less of an emphasis on emerging markets, because now there is choice.”

So far, Australia has been the country most often targeted by China for strategic investments.

Australia’s Centrex Metals Ltd., Mount Gibson Iron Ltd., Gindalbie Metals, and Grange Resources Ltd. have all struck deals with Chinese companies in the past year, The Australian reported.

• Centrex Metals sold a 50% interest in two magnetite deposits to Wuhan Iron & Steel Co. Ltd., China’s third-largest steelmaker for $180 million.
• Mount Gibson Iron brokered a rights issue and share placement to Chinese interests, with two major companies taking a stake of as much as 40% in the miner, while also securing discounted off-take agreements.
• Angang Steel Co. Ltd., also known as AnSteel, China’s second-largest steelmaker, paid $162.1 million to boost its stake in Gindalbie Metals from 12.6% to 36.28%.
• And Grange Resources is currently set to merge with Australian Bulk Minerals, which is majority-owned by a Chinese steelmaker.

Peter Vaughan, a partner at Blake Dawson, a Melbourne-based law firm, told The Australian that major Chinese steel mills kicked off a “wave of investment” in Australia from early 2000 – when China’s global economic clout began first started to build. Vaughan said this trend will continue deep into the current year as depressed asset valuations stack the deck in China’s favor.

“China is now in a much stronger bargaining position than they have been in the last few years,” Vaughan said. “Conditions have previously been in the producer’s favor, but demand drops and the tables turn. The Australian resources sector is now a lot cheaper to place an investment in.”

Denis Gately, head of the resources and energy industry group at Minter Ellison, one of the largest law firms in the Asia-Pacific region, agreed that Chinese enterprises are among the few that have the wherewithal to acquire prized foreign assets.

“They have recognized they are the only people in that position and will likely wait until prices fall further south,” Gately said. “The Chinese have an enormous amount of clout as the only potential buyers.”

In addition to building stakes in smaller miners, Chinese companies will be using that clout to build upon stakes in larger mining giants, which every bit as desperate for cash as their smaller counterparts.

Aluminum Corp. of China (ADR: ACH), or Chinalco, for instance has authorized a special team of analysts to watch for an opportunity to increase its stake in Rio Tinto PLC (ADR: RTP) to the maximum 14.99% allowed by the Australian government.

“We have a special team monitoring Rio Tinto’s performance and market movements in real time and will evaluate the best timing to do the stake increase,” Youqing Lu, the vice president of Chinalco, told dealReporter. Chinalco teamed with Alco last year to acquire a 12% stake in the mining company.

Chinalco is one of ten Chinese companies considering further overseas mergers and acquisitions, Xinhua, China’s official news agency reported.

“The crisis presents a rare opportunity for our domestic companies to initiate cooperation with foreign enterprises,” Xiao Yaqing, Chinalco general manager told Xinhua. “When the time is ripe, overseas acquisitions, strategic investments and joint development could all be considered.”

Canada to Profit From ‘China’s New Deal’

There is no question that, given its proximity to the Chinese mainland, Australia will continue to play a vital role in quenching China’s thirst for commodities. But on the other side of the globe, junior mining companies and exploration firms in Canada are hoping to attract prized Chinese investors.

In fact, the Canada China Business Council (CCBC), Canada’s most influential organization in terms of influencing Canada-China trade relations, recently released a report detailing ways Canadian businesses can profit from China’s recent infrastructure initiatives.

The report, entitled “China’s New Deal: Will Canada Benefit From China’s RMB 14 Trillion Stimulus Package,” was released earlier this month. The study details China’s stimulus-spending plan, and outlines areas in which Canadian companies can support Chinese development by providing resources and technology.

“As one of the world’s leading resource exporters, Canada will definitely benefit indirectly from the Chinese stimulus plan,” the Jan. 9 report said. “As well as energy, other resources such as wood, steel, nickel, copper and aluminum will be in demand. There also will be collateral benefit for Canadian transportation companies and the ports authorities.”

It hasn’t taken Canadian companies long to heed the report’s message, or its wisdom.

Earlier this week, for instance, China’s Tongling Nonferrous Metals Group took a 13% stake in Canada Zinc Metals Corp.

Prior to that, China Mining Resources Group Ltd. announced that it would increase its stake in Canada’s Quadra Mining Ltd. from the current 4.02% to a maximum of 19.9%.

D’Arianne Resources Inc. (PINK: DARUF), a Canadian exploration company, could be next to announce a deal with Chinese partners, as it recently reported strong results from its Lac a Paul phosphorous-titanium property.

“As of today, the very encouraging results coming from this first serious exploration campaign on the Lac a Paul project combined with the interest showed by foreign companies during our visit in China, undeniably confirm the potential of our phosphorous project,” D’Arianne Resources said in a statement.

Finally, Canada has the largest-and highest-quality uranium reserves in the world, making it the ideal partner in China’s quest to develop clean reliable energy.

Delta Uranium Inc. (PINK: DLTUF), engaged in the acquisition, evaluation and exploration of uranium in Ontario and Newfoundland, could also be high on Beijing’s target list.

More than 40 developing countries have recently approached United Nations officials to express interest in starting nuclear power programs. And China alone is planning to build 30 new plants in the next 15 years – a venture that will consume an estimated $50 billion in capital. All told, the country may require as many as 200 plants by 2050.

As with Australia, depressed commodities prices have opened the door to investment in major mining corporations, as well as in juniors in the Canadian market. That means the Saskatoon-based Cameco Corp. (CCJ), the world’s largest uranium producer, could also be in line for a large capital infusion.

“If I’m China Inc., and I have $10 billion, would I buy 60% of Xstrata (PINK: XSRAF), or a lot of reserves out in the middle of nowhere?” Kalaa Mpinga, chief executive of Mwana Africa PLC, a London-listed junior, told The Financial Times. “If I had all these billions, I would do this: Buy 15% of Anglo-American PLC (ADR: AAUK) and get a seat on the board.”

Source: What Companies Are Profiting From China’s Commodities Crusade?

In the past year, it rained pretty hard on Brazil’s burgeoning economy. Its Bovespa stock index is been halved since hitting a record high in May. During that fall, Brazil’s currency, the real, tumbled more than one-third from its nine-year high.

In the fourth quarter, commodity prices and consumer demand continued falling, leading to a loss of 654,946 government-registered jobs in December – the worse monthly loss since the government began tracking jobs data in 1999.
With the interest rate cut – a moved allowed by falling inflation – the central bank hopes the $1.9 trillion economy can keep pace with President Lula’s 2% economic growth target for 2009, a small figure compared to the 6.8% expansion registered by the Brazilian economy in the third quarter of 2008, Bloomberg reported.

Inflation cooled to 5.9% in December, falling within the bank’s target of 2.5% to 6.5%.

“We have a good macroeconomic situation to cut interest rates,” Alexandre Lintz, chief economist at Banco BNP Paribas Brasil SA, told Bloomberg.

Brazil Outlook

In the next three years, China, alone will invest as much as $725 billion in infrastructure, while Brazil will invest $225 billion with very similar goals:

• Strengthen fiscal stimulus, allowing a drop in the value of the real currency (a decline that’s already been substantial) in order to cushion exports.
• Easing capital requirements to Brazil’s strong banking system, which will spur housing and car loans.
• Export financing.
• Begin huge local infrastructure projects.

There is another little-understood phenomenon that cushions the blows for emerging economies: Intra-emerging market trade has become increasingly important.  By now everybody understands that iron ore from Brazil and coal and oil from other emerging markets is flowing into China in order to fuel China’s massive infrastructure buildup and growing consumer demand.

Money Morning Contributing Editor and emerging market specialist, Horaocio Marquez feels Brazil will pull itself through the financial crisis because historically and presently, the Central Bank of Brazil and the Brazilian government have acted very quickly to backstop the liquidity effects against their banks.

Both are run by a superb team of experienced managers, especially adept at controlling the till in rough economic waters, Marquez said.

“The policies, run day to day by a sophisticated technocracy led by top economists and international bankers, many of which held top positions in leading international banks, have allowed Brazil to move forward,” Marquez said. “Hence, Brazil is by far my favorite Latin American play for 2009.”

Source: Brazil Cuts Interest Rates for First Time in 16 Months

How do you measure these things? In yields. This, by the way, is how you’ll know the bubble is popping. When that happens (bond yields rise like a rocket ship) it’s going to unleash financial chaos. But for now, the bubble just keeps on getting bigger and yields on short-term U.S. bonds keep approaching-and even reaching-zero.

“The Treasury sold $27 billion of three-month bills yesterday at a discount rate of 0.005 percent,” reports Bloomberg. It’s, “the lowest since it starting auctioning the securities in 1929. The U.S. also sold $30 billion of four-week bills today at zero percent for the first time since it began selling the debt in 2001.”

How do you think that conversation goes?

“Thirty billion you say? For four weeks? And you’ll pay me how much interest?”

“Nothing.”

“I’ll take it!”

“If you invested $1 million in three-month bills at today’s negative discount rate of 0.01 percent, for a price of 100.002556, at maturity you would receive the par value for a loss of $25.56,” reports Daniel Kruger.

Yes. That’s how much investors currently prefer government backed bonds to equities at the moment. It implies there will be hardly any inflation at all over the next yen years. But that notion should make you spew milk through your nose as you laugh, unless you’re unfamiliar with the growth in the global monetary base. If so, let us remedy that.

Source: Federal Reserve Bank of St. Louis

You can see that in the U.S. alone the adjusted monetary base is…growing. So why isn’t the increase in the monetary base showing up in the kind of inflation that would terrify bond investors and lead to a rebound in commodity prices and equities? That’s another question we got last night.

The answer is that so far, the huge liquidity injections have been quarantined in the financial sector, mostly on bank balance sheets, or on deposits by banks at the Federal Reserve and other central banks. In other words, all the new money is going into bonds and central bank accounts, not into new business or consumer lending.

Put another way, the quantity of money is increasing, but its velocity is not. That’s because the new money isn’t getting into the hands of people who are just itching to spend it. But it will soon enough. And when it does, look for bond yields to rise and the great inflation to begin. Also, televisions and hookers.

“I think this will be the greatest time in my life to buy stocks at these prices. I just wish I had more capital,” said one of the attendees at the Doomer’s Ball last night on Southbank. We heard this sentiment time and again over the course of the evening. And there is no doubt that the valuations are good.

There is doubt, however, about what the Australian resource sector will look like in a world where capital is scarcer. Will it lead to a contraction in the number of viable firms? Is the credit crunch like a meteor strike that kills all the giant reptiles that fail to adapt to the new conditions? If it does, there will be a huge survivor bias favouring the stocks that remain.

But there was also some anxiety about further falls in stocks, especially the longer the bar was open at the Ball. One reader is forecasting another 20% fall on the ASX before the lows are in. In fact, if the All Ords reaches the 2003 lows (2,673) it’s a decline of 24% from today’s levels. If it overshoots that low-as markets tend to do when they correct-you’re looking at a thirty percent fall from current levels.

If you treat it as a thought experiment and ask yourself what would have to happen for the ASX to fall that much, you get some alarming possibilities. The liquidation of Oz Minerals? The dismemberment of Rio Tinto? The fall of a major investment bank or leveraged institution?

Or perhaps it’s something simpler: more falling prices for commodities. That’s what the World Bank seems to think anyway. As reported in the FT, the World Bank’s Global Economic Prospects report says the commodities boom has, “come to an end.” It adds that, “Over the longer run, the price of extracted commodities should fall.” It reckons slower population and income growth will contribute to slower resource demand growth.

Naturally, this is diametrically opposed to the logic of the boom that began in 1999. Then, you had 200 years of falling real prices for tangible goods seemingly reverse itself, mostly because of growth in global population and per capita income. So which thesis is right?

Well you know what we think. We think the Money Migration is the long-term transfer of the world’s wealth from the debt-based consumption economies of the West to the world’s savers and producers, roughly in the “East.” This certainly favours Aussie resources for at least a generation.

But the migration has been massively disrupted by the credit crisis, which is really just an epic attempt by the U.S. and other English-speaking economies to avoid their Day of Reckoning. But don’t you worry. That day is coming. It’s just taking longer than we originally thought. Ben Bernanke is a creative man. And he’s desperate too.

But why don’t we ask China what it thinks? After all, it’s a pretty important party to this discussion. China? What do you think? Hello China. Are you there?

Hmm. China is not taking our calls. Maybe that’s because some Chinese firms are too busy looking for ways to take advantage of the current situation by securing long-term supplies to resources at lower market prices. And maybe actions speak a lot louder than words about Chinese desire for Aussie resources.

“Shenzhen Zhongjin Lingnan Nonfemet Co., China’s fourth-biggest zinc producer by output, said it agreed to acquire a 50.1 percent stake in Australian miner Perilya Ltd. through a private placement,” reports Bloomberg. And Forbes reports that Chinese steel-makers are set to push for a major reduction in iron ore prices to reflect the fall in global steel prices.

The average price in October for a metric ton of iron ore fines, according to Forbes, was $US90.60. But Chinese steel makers reckon that with steel prices back at 1994 levels, iron ore prices should roll back to. In 1994, a metric ton of fines was US$20.40.

A lot has changed since 1994. Supply of ore is up. Demand is up too. But costs for resource producers are way up too. It’s unlikely the steel-makers are going to get a price cut that large. And if they do, it will put some smaller ore producers under enormous pressure (even harder to with stand if you don’t have access to credit).

Where are we then? A year ago BHP held the whip hand and chased Rio in a dream of grand ambition. Now BHP is reconsidering its strategy. Rio is reeling. And pricing power has switched back to resource consumers in China, who are eager to use the whip as well, it appears. There’s been a lot of whipping going on, hasn’t there? More on what it means tomorrow.

Finally, yes. We too saw the reports circulating that the International Monetary Fund is getting ready to dump a bunch of gold on the market. So far, we haven’t found anything to substantiate them. We’re looking around, and will report back on what Diggers and Drillers editor Al Robinson digs up as well. Until then…

Source: The World Bank Goes Nuclear on Commodities

Just months ago, BHP Billiton Ltd. (ADR: BHP), Rio Tinto PLC (ADR: RTP) and Brazil”s Vale (ADR: RIO) negotiated an 86% price increase in the benchmark price of iron ore as demand for steel boomed.

“Iron ore prices should keep pace with steel prices which have fallen to the 1994 level,” Shan Shanghua, secretary in general of the China Iron and Steel Association, told Bloomberg in a phone interview. “We are asking for a big drop in iron ore prices.”

Vale, the world”s largest iron ore producer set the stage for contract negotiations earlier this year when it secured a 70% increase in the benchmark price of its ore. BHP and Rio upped the ante by using their proximity to Asia as leverage to demand benchmark price increases that ranged from 80% to 97%. The average increase in benchmark iron ore prices paid by Chinese steelmakers was 86%.

Steel demand, output, and prices have declined substantially since then, returning some leverage back to consumers.

The benchmark price, established in April, is paid only on material that meets certain specifications listed in the contract. Other material is sold at a discount to the contract price. Of course, considering the slump in steel demand that has accompanied the global economic downturn, it”s unlikely that BHP, Rio or Vale are getting anything close to their negotiated benchmark prices of about $100 per metric ton.

“It”s the reality that current contracts cannot be fulfilled,” Shan said. “Many bigger mills don”t need to import till the end of March, some even the end of May.”

But Chinese steelmakers still aren”t satisfied, and the government wants to take advantage of the opportunity to haggle down the exorbitant prices that producers squeezed out of Beijing last spring.

If Shan is serious about iron ore prices tracking those of steel, China will demand an 82% reduction in iron ore costs, according to Bloomberg. Benchmark contract iron ore fines sold by Rio Tinto, for instance, currently cost around $92.58 a metric ton. However, a return to the levels seen in 1994 would reduce that same iron to a cost of just $16.685 per metric ton.

China also wants the new contract prices to go into effect Jan. 1, 2009, rather than April.

Of course, few analysts believe that China”s demands will be met – regardless of the tepid outlook for steel demand over the next year – and that this is more likely just a case of China giving the ore producers a taste of their own medicine by playing hardball.

“It”s going to be a difficult price negotiation as miners and mills are divided in the market outlook,” Helen Lau, a Shanghai-based analyst with Daiwa Securities Group Inc. told Bloomberg. “But iron ore prices are determined by demand, not steel prices. The association”s comment is part of negotiating tactics.”

Source: China Plays Hardball with Iron Ore Producers, Seeking 82% Reduction in Price