As we first discussed last week with the potential for the imposition of tariffs on imported steel pipes and other steel products (much of which comes from China), the idea of a trade war has now become mainstream news with President Obama’s decision to impose import tariffs on Chinese rubber tires. The Wall Street Journal is calling Obama the first protectionist president since Hoover (and this could prove to be true), but our feeling is that China is really the party driving the change. In the past we have referred to China as the ‘furnace of the world’; now that it is taking significant steps out of that mold (and is in the driver’s seat), the rest of the world has no choice but to adjust. Obama may only regret picking a fight when the next T-bill auction goes “no bid” from China.

With LME copper hovering just under $3.00 for the last couple of weeks, we are hearing from all the usual outspoken sources that the bulls are prevailing with respect to copper’s near-term outlook. However, it is worth noting that in spite of the tenuousness of copper’s recent rise (or perhaps because of it), LME inventories have been consistently rising since early July. Right now these stocks have risen to just under 300,000 metric tons; this is not enough in terms of volume (LME volume is between 1 to 5 million metric tons daily) to cause immediate concern. However, we will be keeping a keen eye on inventory levels as things continue to sort out in the equity and commodity markets.

On Wednesday, the US Commerce Department took the first steps toward imposing import tariffs on steel pipe from China. The tariffs will range as high as 31%, but the average will still be around 21.3%. We usually talk about Chinese export rebates as a good way to look at China’s attitude toward its domestic production, but the same can be said for this measure being considered by the US. This is quite a protective measure being put forth, and we ultimately feel it is a good thing for US manufacturing, which has seen some tough times over the last year or so. This goes right in line with the numbers coming out of China: steel pipe imports into the US from China have seen an increase of over 200% since 2006, and this measure, if instituted, would put a significant dent in that volume for next year.

With lead and zinc prices rising on the LME and looking like they will continue up for the time being, talk of price participation is reemerging from lead/zinc smelters who are grappling with miners asking for higher premiums on concentrates. There have been some recent articles on Chinese smelters asking for yearly contracts for concentrates to include price participation clauses. This makes sense, from their perspective, given the volatility of the LME market over the past several months. However, it is unclear how receptive miners will be to these requests, given that this is the first time in a year that they have seen consistently buoyed base metals prices. We do not expect them to want to share in the current upside until the prices stabilize at least at current levels.

Lately on CNBC and some financial websites, rare earth metals and how they relate to China have become the hip topic of conversation. We have been talking about this for a while, but the news continues to emerge ever day and Chinese involvement in the sector is indeed a crucial factor in understanding how the rare earth market will unfold over the next several years (given their use in everything from hybrid cars to laptops to other high-technology developments). Today we have word out of Australia that a Chinese-owned group plans to take a further 25% stake in Arafura Resources (ASX:ARU), an Australia rare earth metals exploration and production company. Arafura has an enormous land package in Australia, and the Chinese have expressed even more interest than usual in Arafura given its close proximity to China (as opposed to the Canadian rare earth producers and exploration companies). We will keep you apprised of any further developments in this story and the sector in general, as we expect the Chinese interest in rare earths to grow exponentially.

Going along with what we have recently been saying about increasing Chinese demand for raw material metals, the news out of China today that Jinchuan Group will expand production for nonferrous metals by as much as one million metric tons by 2015 comes as no surprise to us. We have indeed been seeing more and more Chinese investment into Canadian nickel companies, as the country looks for ways to satiate its economy’s overwhelming hunger for steel ingredients, and Jinchuan’s increased production will provide more much-needed domestic nickel capacity.

For the last couple of years we have been harping on the fact that as China moves further along toward producing more of the world’s finished products, it has gone from being a net exporter of base metals and other products to a net importer. Far from being the furnace of the world, China is now an importer of copper and aluminum, and it looks like molybdenum is the next metal to go this route. We expect the price of moly to continue to rise, as consumers have exhausted their stockpiles and are now rebuilding them. There is rampant speculation that the Chinese will also begin stockpiling moly as their steel furnaces begin to pick up toward capacity, and if this happens we will continue to see a turbulent market for moly on top of already rising prices.