Robust commodity imports don’t tell the whole China story

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The improved sentiment surrounding the outlook for China’s demand for natural resources is being reflected by rising imports for some major commodities, but as usual it pays to be wary when interpreting the numbers.

Customs data released this week shows strong import growth in the first two months of the year in copper and crude oil, a more modest expansion in iron ore and a surge in imports of alumina and bauxite, the main raw materials used to make aluminium.

Taken at face value this lends support to the view that China is heading for a better spring season after a gloomy autumn and winter cast a pall over the outlook for demand in the world’s largest consumer of commodities.

But it’s worth delving into the numbers to work out if they are truly reflective of rising domestic demand for commodities, or whether other factors are at work, or indeed, whether it may be a combination of influences.

Take copper, for example. Customs data show refined copper imports jumped 27.6 percent to 652,474 tonnes in the first two months of 2016 over the same period last year.

That looks impressive, but it also seems that much of the gain has been driven by differences in Chinese domestic prices and those in the rest of the world.

Traders have been buying copper on the Shanghai Futures Exchange (ShFE) and selling on the London Metal Exchange (LME) on the view that the Chinese currency will continue to depreciate against the U.S. dollar, Barclays said in a March 21 report.

“This trade pushed ShFE copper prices higher relative to LME prices, to an extent that it became profitable to buy physical copper from LME, import to China, and deliver to ShFE,” the report said.

“Physical traders reacted to this arbitrage signal by moving copper into China. A further piece of evidence for the ShFE-LME arbitrage argument is that ShFE deliverable stocks have reached all-time highs while LME stocks have declined to their lowest level since October 2014,” Barclays said.

The Barclays view would mean that China’s rising copper imports have less to do with actual demand for the industrial metal, and more to do with traders trying to lock in arbitrage profits.

This doesn’t bode well for optimism that Chinese demand is actually rising on the back of improvements in housing and infrastructure construction.

There is one part of the copper story that does support the view of increased activity in the domestic market, and that’s the 57.5-percent surge in imports of ores and concentrates to 2.63 million tonnes in the first two months of 2016.

This suggests rising smelting activity in China, which may be a positive sign for demand, but only if the metal is being consumed rather than warehoused, and it isn’t certain that this is the case.

IRON ORE DRIVEN BY SENTIMENT

Iron ore imports also looked stronger than actual demand for its final product of steel, with China bringing in 155.8 million tonnes in the first two months, a 6.4-percent increase on the same period a year earlier.

While there is no doubt sentiment has improved in the steel sector, it’s probably the case that the rise in iron ore imports was more a reflection of mills restocking, taking advantage of the low Asian spot price .IO62-CNI=SI.

Prices were close to record lows for January and half of February, although they have since climbed and been more volatile, with the massive 20-percent spike on March 7 being the standout example.

That surge came after a weekend of positive news from China’s ruling communist party’s conference, although the gains took a week to reverse, indicating that iron ore pricing is becoming more sentiment driven given the rise of futures trading on the Dalian Commodity Exchange.

While higher steel demand may well materialise in the spring and summer peak building season, a positive for China’s mills is that exports of steel products have held up well in the first two months of 2016, dropping a mere 1.3 percent to 17.85 million tonnes from the same period a year ago.

Given the rising number of countries imposing tariffs, or considering them, on Chinese steel, this has to be viewed as positive for the Chinese industry, as they seem to be able to fund alternate markets for their products.

It’s been harder for aluminium producers in the export market, with outbound shipments of semi-finished products dropping 23.8 percent in the first two months of the year to 590,000 tonnes.

While aluminium exports have struggled, it does appear that rising prices have incentivised Chinese smelters back into the game.

The most active ShFE contract has gained 18.3 percent since its record low in late November, and closed on Tuesday at 11,515 yuan ($1,775) a tonne.

This price is just above the 11,500 yuan level that Beijing-based industry consultant AZ China nominated in a March 9 report as key for idled smelters to restart.

The higher price does appear to have resulted in rising imports of alumina, up 23.1 percent in the first two months of the year, and bauxite, up 52.5 percent.

However, the restart of smelters is also likely to act as a cap on prices, and this may already be visible in the ShFE contract, which has remained largely range-bound since March 8.

Crude oil imports are up 9.3 percent in the first two months of the year to 58.49 million tonnes, equivalent to about 7.12 million barrels per day (bpd).

But exports of oil products are up a massive 60 percent over the same period to 6 million tonnes, or about 730,000 bpd, suggesting the bulk of the extra crude being imported is simply being processed into fuels and exported.

Overall, the commodity import data shows that China’s demand for natural resources remains solid, but isn’t necessarily a sign of an economy regaining momentum.

Source: Reuters

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