NOT ALL CHINESE SPENDING IS GOOD FOR COMMODITIES / THE WALL STREET JOURNAL ( RECOMMENDED READING )

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JUNE 1, 2010, 2:13 P.M. ET.

Not All Chinese Spending Is Good For Commodities .

By LIAM DENNING

It is rarely a good idea to become overly reliant on one customer. Especially when that customer is trying to build a rival supply business of its own.

China accounts for 36% or more of global demand for metals like copper, aluminum and zinc, according to Barclays Capital. Its share of oil consumption is only 11%, but it is the world's biggest source of demand growth by far.

One big risk with a key customer is that its appetite wanes. Another, less obvious one, when it comes to China is its effect on the supply side.

China's approach to dealing with its shortages of raw materials is "to throw money at it," says Jennifer Richmond at Stratfor, a global intelligence firm. Chinese firms have spent $79.6 billion acquiring foreign natural-resources producers since the start of 2008, according to Dealogic. Meanwhile, Beijing has struck deals from Russia to Africa offering loans and infrastructure development in exchange for minerals.

China reckons its sheer size means it "should be given a discount" on raw-materials prices, says economist Phil Verleger. Diversifying suppliers, by financing new fields, mines, pipelines and the like, is a strategy for doing this.

It doesn't always work: China's tortured attempts to wrest discounts from iron-ore suppliers have yielded little on price cuts thus far.

But throw enough money at boosting supply, and deflationary pressures on prices increase: Investors in the growth-obsessed U.S. natural-gas sector can relate. Metals like aluminum and steel have become vulnerable as China has built surplus production capacity at home. Oil is vulnerable if Chinese capital helps open up resource-rich provinces like Iraq to raise supply.

Willing to prioritize strategic concerns over economic returns and open to dealing with pariah regimes, China's wallet could yet spell trouble for commodities bulls.

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