China’s imports of most major commodities rebounded in August, but the strength in arrivals of crude oil, iron ore and coal is more likely related to temporary factors rather than a recovery signal for the world’s second-largest economy.
Crude oil imports surged to 12.43 million barrels per day (bpd) in August, the third-highest daily rate and up 20.9% from July, according to data released on Sept. 7 by the General Administration of Customs.
Imports for the first eight months of the year are up 14.7% from the same period in 2022 after China ended restrictions aimed at preventing the spread of COVID-19.
While domestic travel has rebounded, thereby lifting demand for gasoline and jet fuel, there are other factors at work driving China’s crude imports.
Chief among them is that China has been building inventories for much of the year, adding about 950,000 bpd to storage tanks in the first six month of the year.
Refiners reversed this trend in July, drawing on stockpiles by about 510,000 bpd as they processed more crude than was available from imports and domestic output.
However, this was largely due to soft crude imports in July, which saw arrivals of 10.29 million bpd, which was the lowest in six months.
The question then becomes why did crude imports drop in July even though refinery processing rates remained robust?
The answer is likely that China’s refiners pulled back on buying oil for July delivery, because at the time the cargoes were arranged global benchmark prices had been rising and were close to their highs for the year.
Brent futures LCOc1 reached as high as $87.49 a barrel on April 13, having rallied strongly since a low of $70.12 on March 20.
This spike in prices would have come at the time China’s refiners were securing cargoes for July delivery, and it seems that they trimmed imports because they were reluctant to pay top dollar for crude.
Brent prices then slid from the April peak to a low of $71.28 a barrel on May 4, and then traded in a relatively narrow band until late June, when they started to rally strongly as Saudi Arabia, the leading producer in the OPEC+ group, extended its voluntary output cut of 1 million bpd.
The extension of production cuts by Saudi Arabia and Russia, the second-biggest producer in the OPEC+ group, has resulted in oil prices rising, with Brent reaching its highest level so far in 2023 of $91.02 a barrel on Sept. 8.
The strength in China’s crude imports in August is likely because at the time the cargoes were bought, crude prices had fallen, given the lag of up to three months between when shipments are arranged and delivered.
This means that China’s crude imports in September may be robust, but arrivals from October onwards would have been bought at higher prices.
History suggests that China’s refiners tend to trim imports and dip into stockpiles if they believe prices have risen too high, or at too rapid a pace.
Turning to inventories may end up being a profitable move for China’s refiners, as it allows that to continue to run plants at high rates, thus allowing for increased exports of refined products at a time when the margin on diesel is elevated.
It also allows them to put some downward pressure on global oil prices by reducing demand, with the swing between a weak and a strong month for crude imports being as much as 2 million bpd.
China’s coal imports hit a record 44.33 million metric tons in August, up 12.9% from July and 51% higher than the same month last year.
For the first eight months of the year imports have surged 82% to 306 million metric tons, according to official data.
The strength in coal imports is being driven by factors largely unrelated to the state of the economy. The increased shipments have had to supplement soft domestic output, which has struggled to meet demand as coal-fired power consumption has surged given the weakness in hydroelectric generation.
Seaborne coal prices have also weakened sharply this year as the market adjusted to the energy shock caused by Russia’s February 2022 invasion of Ukraine.
This means imported coal prices have been more competitive than domestic supplies, and Beijing has been content to allow sharply stronger imports to meet demand and put some downward pressure on domestic prices.
Iron ore imports climbed to 106.42 million metric tons in August, up 13.8% from July as steel mills moved to replenish lower than usual port inventories, and as spot prices for the steel raw material were soft during the purchase period for August-arriving cargoes.
Whether the strength will be maintained depends on whether steel consumption starts to increase amid the somewhat limited stimulus measures enacted by the authorities in Beijing, or whether the ongoing woes in property construction start to drag more on the sector.
With crude oil, coal and iron ore all having dynamics separate to the overall state of China’s economy, the commodity that appears most correlated with the outlook is copper.
Imports of unwrought copper were 473,330 metric tons in August, down 5% from the same month in 2022.
For the first eight months of the year, imports of the key industrial metal are 10% lower than for the same period in 2022, reflecting weakness in manufacturing and construction.
It’s likely that copper imports will have to turn around in order for confidence to return that China’s economy is strengthening.