Mikey Likes It !

Jim Brown
 
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Remember the Life cereal commercial where the brothers gave their bowl to Mikey to see if he would east it? Mikey dove right in and prompted the famous saying, "Mikey likes it and its good for him too!" We found out today that Mikey or in this case China likes ETFs and they are good for them too!

China Investment Corp, the sovereign wealth fund, invested for the first time in Q4 in the U.S Oil fund (USO). The did it in a big way with a two-million share purchase and they became the fourth largest holder of the fund with a 3.48% stake with a current value of $78.6 million.

Not only did they buy the USO but they also bought the Gold trust (GLD). They acquired a 1.45 million share or .4% stake in the GLD worth $1.55.6 million.

I am shocked that they went the ETF route. With a $300 billion fund I am very surprised they didn't just buy the futures in oil/gold where they could get a pure play for their money. China invested $10 billion in commodity assets in the second half of 2009.

One analyst suggested they were aware of how their large positions would influence prices in the commodity world and choose to do it through ETFs rather than spike prices with their entries. Since these ETFs buy the commodity as well I am not sure this was a sure fire method to not influence prices. The investment in the GLD ETF is equivalent of 145,000 ounces of gold that the GLD managers had to acquire. China already owns 33.9 million ounces according to the IMF.

Another way China has been buying commodities is the purchase of stocks, ownership rights and even the companies themselves that produce the commodities. In the case of oil China has been buying production for decades in advance and actual the actual physical reserves themselves. In 2009 China bought 11% of Kazakhstan's state run energy company, 45% of Nobel Oil Group of Russia and 17.2% of Teck Resources, a Canadian based metals producer.

Goldman Sachs is the largest holder of the USO with 5.3% or 3.045 million shares. Paulson & Co, an institutional investor holds 8.68% of the SPDR Gold trust equal to 31.5 million shares. China could buy both ETFs and pay cash but their money is best used picking up companies in key locations around the world. Uranium is another play and I expect a big announcement from China on that soon. With their current plans for 10 new nuke plants a year it is going to take a lot of uranium to keep them running. Until then coal is still king and they are sucking up monster quantities of coal from all over the world. In 2008 global coal production was 6.8 billion tons and consumption 6.7 billion tons. China produced 43% of the world's coal. Up until 2006 China was a net exporter of coal and now they are a net importer.

China signed a huge deal with Resourcehouse in Australia to buy 30 million tons of coal per year for the next 20 years. China Power International (CPI) said it was the biggest ever export contract from Australia and worth $60 billion.

Under the agreement the company will build a new mining complex in Queensland Australia and construct 311 miles of railroad to move the coal to the coast. The project is expected to begin construction later this year and will produce 40 million tones per year, 10 million more than China contracted for starting in 2013.

Chinalco, another state owned energy company attempted to buy Australian mining giant Rio-Tinto but failed.

China is working hard to tie up as much global coal as possible because India is running out of locally produced coal and will also be entering the global market in a big way over the next couple years. In this case the early bird gets the coal.

Jim Brown

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