- Money Morning Australia

Follow the Vampire Squid to Aluminium

Written on 27 July 2013 by Callum Newman

Follow the Vampire Squid to Aluminium

Today’s Money Weekend will touch on a familiar theme before revealing a metal play that could remake one of the world’s biggest industries.

But first, there was no avoiding China this week. Jim Chanos will be smiling. If you happened to catch last week’s MW, you’ll know Jim Chanos is ‘short’ US blue chip Caterpillar, a company highly leveraged to mining and construction, especially in China.

Well, Chanos is on track for the moment. Caterpillar reported this week a 43.5% drop in quarterly profit and cut its outlook for the year, according to Reuters. 

The news this week out of China of a contracting Purchasing Manager’s index won’t have eased any worries in the Caterpillar boardroom, either. Preliminary data has the PMI at 47.7, an 11-month low. A reading above 50 means expansion. Of course, you wonder how reliable and useful any of these readings are. But there’s no doubt they shift sentiment, and in the short term, that moves markets. 

The Two Choices: Inflate or Shakeout?

The question that hangs, of course, is how the Chinese authorities will respond to the continuing slowdown. In the past, any slowdown has been veered off from a familiar playbook: more credit and ‘stimulus’.

It probably boils down to the usual two choices from Washington to Canberra to Beijing. If China stays tight, credit and liquidity could dry up and a lot of industry will get the shakes. That means unemployment and protests, which threatens political stability. The second is to turn the credit tap on again, keeping the growth engine happening to keep millions employed rather than rioting in the streets.

The IMF showed last week that China’s total credit has grown from $9 trillion to $23 trillion since 2008. That’s now 200% of GDP.

Source: IMF

In other words, as yet there doesn’t seem to be any sign of the famous ‘rebalancing’ that’s supposed to be occurring away from investment toward consumption. Chinese Premier Li has made it known previously he isn’t a fan of another major credit expansion. But what about this little snippet in the Australian Financial Review on Friday?

‘Chinese Premier Li Keqiang said the nation will speed railway construction, especially in central and western regions, adding support for an economy that’s set to expand at the slowest pace in 23 years…

‘Additional spending would help the world’s second-largest economy, after the government signalled this week it will protect its 7.5 per cent growth target for this year following a second straight quarterly slowdown.’

You know what they say about old habits…

Is there a limit to this? Greg Canavan over at Sound Money Sound Investments says yes, and that China’s economy is more unbalanced than ever. This is the endgame he’s been hunting, and the reason he expects a panic. But it’s mostly government and politics, not markets, that put the figures you see there that high, so can those same things send them higher again? We don’t think you can rule it out. 

The Vampire Squid Strikes

Of course, you can’t rule out anything these days. The New York Times revealed this week that Goldman Sachs might be manipulating the base metal market in quite a bizarre way. This is, of course, the investment bank that has the reputation that brought out Matt Taibbi’s memorable line to describe them as a ‘great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money.

The apparent scheme is to keep aluminium traded on the major US commodity exchange in storage for longer via bogus bottlenecks to clip more rent while it sits there. That’s a cost that shows up for the end user, like any time a bloke in the US cracks open a tinny. It’s not strictly illegal, more like a lucrative loophole. And when has a bank ever passed up an opportunity like that?

Check it out!

‘The story of how this works begins in 27 industrial warehouses in the Detroit area where a Goldman subsidiary stores customers’ aluminum. Each day, a fleet of trucks shuffles 1,500-pound bars of the metal among the warehouses. Two or three times a day, sometimes more, the drivers make the same circuits. They load in one warehouse. They unload in another. And then they do it again.’

But the main reason this caught our eye is the metal itself. Aluminium is not a headline metal like gold or silver, but in the latest edition of Australian Small Cap Investigator, Kris Sayce showed how the aluminium market is locked in a high stakes battle with steelmakers for market share in one of the world’s biggest industries: car manufacturing. Any false cost embedded in the metal will be showing up there too.

We’re reliably informed that Goldman’s game is up because ownership of the London Metal Exchange (that regulates the warehousing) has changed hands. The new chiefs in Hong Kong want to put a stop to it. This could bring more supply of aluminium out and bring the price down.

If so, the takeaway for investors is aluminium could became even more attractive to manufacturers. Kris Sayce says it already is something like a ‘magic metal’ because it can reduce car weights and increase fuel efficiency. Had you heard that? No, neither had we. It’s a technological innovation that could be good for your pocket and the environment if the car industry makes a major switch in how they produce their cars.

Kris says the mainstream missed the story completely. Intrigued? You can see what he says here.

Callum Newman+
Editor, Money Weekend

Join Money Morning on Google+

From the Port Phillip Publishing Library

Special Report: The Sixth Revolution

Daily Reckoning: Productive Investments

Money Morning: Is This the Spark to Send Australian Property Crashing?

Pursuit of Happiness: Foreign Family in Taxpayer Rort…Or Royal Celebration?

Already a subscriber to Money Morning... or simply, just like what you're reading? Then show your support and spread the word...
Share this post on...

Callum Newman
Callum Newman is editor of the Money Morning weekend edition and co-editor of Port Phillip Publishing’s subscribers-only email Scoops Lane. (To have Money Morning delivered straight to your inbox you can subscribe for free here). If you're already a subscriber to these publications, or want to follow Callum's financial world view more closely, then we recommend you join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays.

Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au

1 Comments For This Post

  1. James Says:

    Have to disagree on aluminium ‘being good for the environment’. And thought I might share my reasons from a geologists view. Aluminum is sourced from bauxite ore. Bauxite is formed in well drained soils i.e. tropical rain forests in South-East Asia and North-Eastern Australia. Aluminium and iron are non-mobile elements and do not leach out of the soil profile easily, i.e. these elements remain while all other common elements found in soil are washed away or leached out of the soil profile. In certain high rainfall settings Fe is also leached from the soil leaving only Aluminium and this gives rise to bauxite ore. So I must say that bauxite mining is one of the most destructive forms of mining due to the inherent nature of the locations of where it is formed. I’d say that lighter/more fuel efficient cars has a negligible or negative influence when you account for this.

FREE INVESTMENT REPORT: The Top 5 Oversold Blue-Chip Stocks in Australia

These five Aussie stocks all have something very powerful in common…and it could see them bounce up in the coming weeks and months. For all the details download this report right now.

PLUS you'll get Money Morning every weekday...absolutely free.

Enter your email address below and hit the 'Claim My Free Report' button now.

Privacy Statement
We will collect and handle your personal information in accordance with our Privacy Policy.
You can cancel your subscription at any time

Diggers and Drillers

A 3-Point Plan to Re-Engage with the Aussie Mining Boom

This new video reveals a way for Aussie share investors like you to RE-ENGAGE with the next phase of the mining boom…while valuations are still dirt-cheap…

The plan centres round three specific stocks.

To find out what they are, click here.

Australian Small-Cap Investigator

The Australian wildcatter
exploring oil's 'final frontier'

The US Geological Survey says this area contains up to 71 billion barrels of oil.

Only a few explorers have secured licences to drill.

One of them is a daring little Aussie firm that begins drilling 'in early 2014'.

According to small-cap analysts Tim Dohrmann it's impossible to speculate just how high this one could go. Find out why here.

World War D

Couldn’t make it to our
‘War Summit’?

Don’t sweat it. Click here for the next best thing…

World War D was the most important meeting of minds of the decade so far. What came out of it will almost certainly force you to reshape your investment plan for the rest of the decade. There's no way to go back in time and get inside the Savoy Ballroom of the Grand Hyatt.

But you can do the next best thing…
to find out what it is, click here.

  • ^NDX3534.532+1.446 - +0.04%
  • ^FTSE6625.25+41.08 - +0.62%
  • ^AORD5444.800+32.200 - +0.59%
  • ^AXJO5454.200+33.900 - +0.63%
  • AUDUSD=X0.933
  • USDJPY=X102.405

Graphic Ad 1 – Blue Chip Stocks Report

Revolutionary Tech Investor

This report is about TECH MOON-SHOTS

Four of them, to be precise.

It's an early-days project. But one biotech aiming for the cancer moon-shot is already up - get this - 497.14% since tipped.

For four more tech moon-shots, click here.

Gowdie Family Wealth

The worst mistake you can make when handing wealth on to your kids

This brand new investor briefing shows you what your family’s in for if you don’t take care to leave your wealth to them in exactly the right way.

And it shows you precisely how to prevent infighting, recklessness and misunderstanding over money.

Read it here.

The Money For Life Letter

Holden. Toyota. Qantas. BUST

Do you really expect the share market to boom in times like these? That's why Nick Hubble says the best thing you can do right now is invest for safety and income.

This brand new video shows you how you can get predictable, reliable and rock solid cash flow no matter what happens in the wider economy.

You could lock in up to $20,000 a year - and that's just the start. See how here.

Sound Money. Sound Investments. [bullish prediction]

Greg Canavan's first bullish prediction in four years

Greg Canavan
doesn't make forecasts like this often.

When he does, it's because he’s found something that could make you money for years to come.

Read more here.

Is the Australian Housing Boom Really Back?

The Denning Report

2014 Predicted

Dan Denning accurately forecast 2013's flight from
bonds to stocks, the commodities crash and the
Aussie dollar top…to the exact week

In this brand new forecast report, he shares his
three critical predictions for 2014…

More Recommended Reading Below...

The Pursuit of Happiness & The Daily Reckoning

  • The Pursuit of Happiness
  • The Daily Reckoning Australia

Done properly, a retirement business can not only help fill a retiree’s time and replace their work [Read More...]

Free speech is no longer really a right at all. Governments, vested interests, and lobby groups are [Read More...]

Australian house prices are going to remain high. Perhaps finally, when the last baby boomer retires [Read More...]

Make sure that the changes you make to your financial plan are from a credible source. Otherwise the [Read More...]

It was day two of the World War D conference, and the final session was starting. We were closing th [Read More...]

The US dollar has value because the government levies $3 trillion in tax liabilities annually and ac [Read More...]

The best course of action is to focus on generating wealth and investments outside of the government [Read More...]

Since the US Federal Reserve’s relief efforts began, total world debt has gone up by $30 trillion, w [Read More...]

A one size fits all strategy or rollover to your own self managed super fund with the ability to tai [Read More...]

Services will boom according to the Reserve Bank of Australia. Sales assistants and tour guides are [Read More...]


"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery