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16 Apr, 2009 18:26

Copper prices rise on strategy of the dragon

Copper gained for a fifth consecutive session in London - the longest rally in 14 months - on increased imports from China, amidst speculation Beijing is buildings its metals stocks for strategic reasons.

China imported 375 thousand tones of copper in March – up 40 percent since January – despite modest demand from manufactures and a background of slowing growth. Copper prices have jumped to $4900 per tonne and Vladimir Osakovsky, Chief Strategist at Unicredit, says Chinese stimulus measures are a key factor.

“The Chinese government is providing a major fiscal boost to domestic investment, which may support continued demand for commodities by the Chinese economy.”

But China has wider motives for investing in copper stocks. Tim McCutcheon of DBM partners say with $2 trillion of reserves, China is diversifying out of US bonds and dollar holdings, as well as building strategic stocks.

“At some point in the future there will be massive dollar inflation which will make dollars worth less than they are now and your ability to buy things less than it’s now. The Chinese are trying to mitigate the effect of that as much as possible through buying hard assets.”

At the G-20 summit in London China pushed hard for an alternative to the dollar as the world's dominant currency. Just a month before the summit, the Chinese Central Bank Governor urged a revival of the idea of a currency based on commodities -proposed sixty years ago by the British economist John Maynard Keynes.

With cashed up Chinese State owned corporations currently buying into metals producers in South Africa and Australia – most notably the bid by Chinalco for a slice of Rio Tinto – it seems China will use its reserves to get the resources it needs for future generations,  by buying the commodities or buying the producers, and at the same time diversify away from the risks of  U.S. dollar inflation.