China to Boost Commodity Imports to Build Stockpiles

China, the world’s second-biggest energy user, will increase imports of commodities including oil and boost inventories of strategic raw materials while prices are at their lowest in seven years.

China will expand purchases of important resources, Premier Wen Jiabao said in a report delivered to the legislature’s annual meeting today in Beijing. The country will increase emergency stockpiles, the National Development and Reform Commission, the country’s top planner, said separately.

The world’s third-largest economy imports more than 40 percent of its oil, contributing to benchmark oil prices in New York reaching a record $147.27 a barrel in July last year. Oil has fallen about 70 percent from the record as the global recession cuts demand.

“China’s intent to build strategic reserves and product inventory will help mitigate some of the weakness” in domestic oil consumption, Credit Suisse research analyst Prashant Gokhale said in a report today.

The nation’s current strategic stockpiles of mineral resources are insufficient to fend off “global market risks,” the Ministry of Land and Resources said in January, without elaborating. China will build emergency stockpiles of coal and metals such as copper and chrome to guard against potential supply disruptions, the ministry said then.

Government stockpiles of oil will reach 12 million tons in 2010, equivalent to about 30 days of imports, Chen Deming, the former vice chairman of the National Development and Reform Commission, said in September 2007.

Stockpile Plan

The government has finished drawing up a plan to build the second phase of the country’s oil stockpiling with a capacity of 26.8 million cubic meters, the commission said in November. The nation is building four stockpile bases in the eastern provinces of Zhejiang, Shandong and Liaoning, it said.

China is building reserves to take advantage of weak commodity prices and enhance national security, analysts have said. The Reuters/Jefferies CRB Index of 19 commodities this year fell to the lowest level since June 2002.

The Chinese government will tap its $1.95 trillion currency reserves, the world’s largest, to secure resources, China National Petroleum Corp., the country’s biggest oil producer, said last month.

Currency Reserves

China earlier this year entered into an oil-for-loans accord with Brazil and Venezuela. Russia agreed last month to supply China with 15 million metric tons of oil a year for the next 20 years in return for $25 billion in loans.

State-owned companies last month announced plans to invest $22 billion in miners, securing iron ore, copper and zinc assets from debt-laden companies unable to secure funding in the global recession.

China Investment Corp., the $200 billion sovereign wealth fund, may invest in “undervalued” commodity assets, Executive Vice President Jesse Wang told reporters yesterday on the sidelines of a meeting of the country’s legislative advisory body in Beijing.

The nation’s government is buying commodities as it attempts to diversify investments away from Treasuries. China boosted purchases of U.S. debt by 46 percent to a record last year.

China should invest its foreign exchange reserves in gold and copper, rather than in U.S. Treasuries to seek higher returns, Fu Jun, vice chairman of All-China Federation of Industry & Commerce, said at the congress today.

“We don’t need to buy more Treasuries as the returns are low, whereas if China buy copper and gold, the annual returns could be as high as 10 percent,” Fu said.

Gold Standard Fans Yearn for Great Depression: Michael R. Sesit

Gold can be worn as jewelry, used as an investment and deployed as a hedge against economic and political risk. It can also serve as the anchor of a country’s monetary and exchange-rate policy.

The first is a matter of personal taste. Investments and hedges are often related; their success boils down to the price initially paid for the metal. History shows that as a hedge and investment, bullion over the years has performed both spectacularly and miserably, depending on the time frame.

A return to the gold standard, where countries peg their currencies to a given quantity of the metal and thus to one another, is a bad idea. Gold-based monetary systems are overly rigid and restrictive, possess a deflationary bias and can be volatile. They make long-term inflation dependent on the pace of mining output in places such as China, South Africa and Russia. Bullion-based policies are also as prone to political manipulation as those not anchored in the metal -- something few gold bugs are willing to acknowledge.

Gold has been on a tear. Futures soared 35 percent from $705 an ounce on Nov. 13 through March 2. Before retreating, the metal traded as high as $1,007 on Feb. 20, its first move above the $1,000 plateau in almost a year.

Extended Recession

The high price reflects investors’ concerns that massive deficit spending and ultra-loose monetary policies will reignite inflation. Paradoxically, worries about an extended recession and that policy makers won’t succeed in rescuing the global banking system also haunt investors.

Gold is now regarded as a hedge against both inflation and deflation, says Alan Ruskin, the chief international strategist at Greenwich, Connecticut-based RBS Greenwich Capital Markets Inc. The first is reflected in the high dollar price of bullion, the second by the surge in gold’s price in euros.

When gold last traded at more than $1,000 on March 18, 2008, the metal’s price was 643 euros an ounce. Yesterday, it was 743 euros in late European trading. Some folks interpret gold’s rally against the dollar at a time the greenback is strengthening against many currencies as a sign of investor disenchantment with fiat, or paper, money -- legal tender with no tangible backing except the good faith of the government that issued it. The risk is that hyperinflation may render it worthless.

‘No Safe Store’

“In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value,” former Federal Reserve Chairman Alan Greenspan wrote in 1966, when he was running consulting firm Townsend-Greenspan & Co. in New York. “This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.”

Not so fast, Mr. Greenspan.

A gold standard tends to have a recessionary bias. When speculators and others attack a country’s currency, the burden usually falls on that nation to adjust by contracting its economy and increasing unemployment. The system places no matching requirement on countries with “strong” currencies to adjust.

The inflexibility of the gold standard makes it difficult for governments to adopt policies best suited to their domestic economic needs.

Take South Korea. Its currency, the won, has fallen 29 percent against the dollar in the past six months. Such a depreciation wouldn’t have been permitted under a gold standard. Korea would have been required to support its currency by raising interest rates to maintain the won’s parity with bullion, exacerbating an already virulent recession.

Gold and Depression

In a parable with relevance to today’s economic environment, “attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941,” Bradford DeLong, an economist at the University of California, Berkeley, wrote several years ago.

Commitment to the gold standard prevented the Fed from expanding the money supply in 1930 and 1931, forcing President Herbert Hoover “into destructive attempts at budget-balancing in order to avoid a gold-standard generated run on the dollar,” DeLong said.

China, the U.S., South Africa, Australia, Russia and Peru make up the six biggest gold producers. If their mining operations were interrupted by, say, political upheaval, it could lead to deflation and rising unemployment. In contrast, major improvements in mining technology could ignite inflation.

BP Shuts Units, Cuts Runs at Texas City Oil Refinery

BP Plc was forced to shut units and curtail operations because of a malfunction at its Texas City refinery, the fourth-largest in the U.S.

BP is still determining how long the units will be off line, spokeswoman Sheila Williams said today by telephone from London, where BP, Europe’s second-largest oil company, is based. The malfunction occurred in a sulfur recovery plant early yesterday morning, Williams said.

Production rates from units that produce large amounts of sulfur, such as cokers and hydrotreaters, have been reduced, a person familiar with the refinery operations said.

The fault may reduce supplies of gasoline as demand recovers before the peak summer driving season. The Texas City refinery, which can process 475,000 barrels of oil a day and is BP’s largest, returned to normal operations at the end of 2008 after a blast killed 15 people three years earlier.

BP expects to flare, or burn off gases into the air, until 2:30 a.m. local time tomorrow, according to a filing with state environmental regulators. An estimated 30,000 pounds of sulfur dioxide may be emitted during the flaring, which began at 2:30 a.m. yesterday, the filing showed.

Gasoline for April settlement rose $1.08, or 0.8 percent, to $1.297 a gallon at 7:02 a.m. local time on the New York Mercantile Exchange.

Flares are safety devices that prevent excessive pressure from building up in processing units that are being shut down or started up. Sulfur-recovery plants capture and hold sulfur removed in fuel-processing.