MaSSSoftech

By: Andrew B. Busch
CNBC Contributor

Andrew Busch

Andrew Busch
Global Finance Strategist
BMO Financial Group

According to China Daily, China's Ministry of Industry and Information Technology is currently drafting a guide to mergers and acquisitions in the iron and steel industry, and to curb overcapacity will disallow expansion projects in the steel industry for the next three years. Here's what I've been worried about: "annual production capacity is currently 660 million tons, while demand is only 470 million tons, indicating a surplus of 190 million tons, said Li Yizhong, minister of MIIT. Furthermore, projects that will add 58 million tons of capacity are under construction."

From rice hoarding to stockpiling copper, China's merchants have a long history of commodity speculation and today appears to be no different. With Chinese exports and US consumption down, the bet is that things rebound soon and the Chinese will have locked in cheap iron ore, copper, and other commodities. (As an example of the speculation, copper has risen 4.6% this week alone and might break $3.0) So far, demand has not rebounded to match the significant rise in commodity prices.

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From yesterday's retail sales disappointment to today's lower than expected University of Michigan's sentiment index, we see that the US is not consuming like it has in the past. Since China's economy is 40% exports, you have to wonder how long domestic growth can spur GDP.

What's worrisome for the United States is that inventory rebuilding and CAPEX is expected to lead growth in Q3 and Q4. Granted we've fallen so far, everything looks up from here. Yes, the economy has stabilized, but stabilized at extremely low levels. It looks like the Chinese are building things that no one is buying and their inventories are going up.

This has major implications for the Pacific Rim and for global commodities. Something has to give and give soon. We need to have a rebound in global demand or we'll see bad things happen to commodity prices.