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Singapore lags China in resources accumulaton

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Some time back in late March, I wrote a post regarding Singapore’s SWFs’ curious inaction in the global commodities markets as compared to China.  Fast forward four months later, it seems that nothing much has changed.  Sure, in the same period of time we saw Temasek’s incoming CEO reject his appointment and resign from the board altogether. Singaporeans also learned, during that period that Temasek Holdings divested itself of Barclays and BofA shares at a mind-numbing loss of over S$5 bn.  To its credit, Temasek Holdings did procure some energy deals.  However, a comparison with China’s reserve funds show that Temasek is severely lagging behind.

A friend forwarded me an article which advances the theory that China may be dumping the US dollar in favour of metals:

Now just because the SRB stockpiles metals, one can’t conclude that those purchases mean China has relinquished US dollars. The way China exchanges dollars for commodities requires it to a) buy those metals from overseas suppliers and b) buy those metals in US dollars. We would contend that aluminum and indium (I won’t comment on praseodymium) purchases have generally speaking taken the form of domestic buys. Recent estimates suggest the SRB has purchased 590,000 tons of aluminum (locally) already according to this article and 200,000 tons of refined zinc, also from domestic sources.

The SRB has purchased approximately 300,000 tons of copper from offshore sources. At $4250/ton (our best estimate as to average purchase price) that means China has converted $1.275b of its dollar reserves to metal. Rumors suggest the Chinese may want to purchase up to 1 million tons of copper for an incremental conversion of $2.975b. Adding in zinc, cobalt or any other metal, we believe this strategy would likely only convert $5b to metal. Of course we have not considered gold into the equation, also a possibility. That represents a very tiny percentage of China’s entire US dollar reserves.

In contrast what has Singapore been doing with its foreign reserves?  There doesn’t appear to be any indication from MAS that foreign bonds and currency has been used to purchase commodities.  We saw how the price of oil sky-rocketed last year to slightly above US$140 a barrel, indicating that whomever was in position to benefit from a spike almost certainly did.

To make things worse, earlier last month Keppel Singapore sold Singapore Petroleum to China. As Alex Au noted, have they lost faith in possible future earnings by SPC when the world economy recovers again?

It may not be a good idea to start buying gold now, given that the precious metal currently has an inflated price tag due to the worldwide recession, but shouldn’t we be seeing at least some effort by Singapore to diversify its reserve wealth by investing in commodities? Especially when most of those commodities are probably currently under-valued due to the global recession?  Singapore’s founding father MM Lee Kuan Yew is fond of saying that Singapore succeeded despite a complete lack of natural resources. The question that should be asked is: Now that Singapore has the wealth, why isn’t it being more aggressive in purchasing resources which Singapore is devoid of?

One of the reasons fingered for Goodyear’s resignation from Temasek was that some in Temasek disapproved of his aggressive move into commodities.  One can only hope Temasek would learn from the man’s experience if not from him himself.

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Written by defennder

July 28, 2009 at 9:10 PM

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