What if China really has bottomed? What if the moves in iron ore, aluminum, copper and Baltic Freight -- up almost every day albeit off a very low base -- are for real?
Don't we have to start thinking like that?
We can run through a bunch of other scenarios that might be contributing to the commodity rally. People have central-bank-it is, so they are always going to gravitate toward the idea that Mario Draghi caused this move with another round of negative rates and a bigger lending facility to hobbled banks. With rates this low, you can see someone saying, "Let's go buy commodities." But they've been this low for a while and that hasn't triggered a bottom in these commodities.
I will buy into the notion that Europe could be in expansionist mode again, with more lending, and if there is more lending then there will be more buying. Twenty-five percent of Chinese exports go to Europe, so what's good for Europe is going to be good for commodities.
We also know a lot of the producers have cut back. Freeport (FCX) has slowed copper expansion. BHP (BHP), Rio Tinto (RIO) and Vale (VALE) have stopped their three-way suicide pact to overproduce. Alcoa (AA) has cut back smelter capacity worldwide. The Chinese have also tried to take aluminum out of production. Maybe supply cutbacks can explain some of the bounce.
Some might be reading the protests in Brazil as a possible change in government that could get that economy moving again. That's a stretch, but millions of people peacefully protesting gets noticed around the world.
In the U.S., we have data from the Federal Reserve that show a continued pickup in construction spending. I know no one ever thinks of us as a swing growth nation, but we certainly aren't part of any drag.
You have Iran, a nation of 77 million, coming back online, but who knows how long that will take before the new oil money translates into new infrastructure? India does have a pro-growth government and that matters, but not to the effect that could explain the commodity rally.
I keep coming back to China and the urbanization thesis -- 10 million people are expected to be lifted out of poverty this year, and while we do know of millions of square footage of empty building space, there hasn't been much building of late. Could the middle-class-growth thesis be coming back into play? We are getting some stories like one from Reuters this weekend saying China just completed $817 billion worth of infrastructure projects involving clean energy, transportation and telecommunications. You know there's plenty more where that came from. I don't want to relate anything to the Chinese stock market, but it does seem the government hasn't had to spend its reserves propping it up as furiously as it did before and has allowed it to come down to levels where it might be more realistic, although still overvalued.
I come away with a sense that something's happening worldwide, that it crystallized in that second week of February when we saw the faux credit crisis ending, one that seemed to have woken up central bankers on the need for another round of stimulus, but also one that involved critical cutbacks of many major commodity producers in order to preserve balance sheets, which left the supply side tighter even as demand might have, at last, had a pickup.
It's the best I can do to explain the rally. But it is something that makes more sense than anything else I have heard, as preposterous as it sounds, that anything could actually change the trajectory of China from a drag to a positive again.