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November rebound in China’s key commodity imports may not last

China’s imports of major commodities were unequivocally strong in November but the robust performance may owe more to short-term dynamics that may not persist over the longer term.

The world’s biggest commodity importer had up until November turned in a somewhat patchy year in 2020, with weakness in crude oil, iron ore and copper, but resilience in natural gas and coal.

November’s customs data, released on Tuesday, saw a return to higher imports across the commodity complex, with several reaching multi-month highs.

Crude oil imports were 10.17 million barrels per day (bpd), up 14.3% from October’s 8.9 million bpd, although still below the 11.04 million bpd from November last year.

Chinese refiners returned to buying crude for November delivery, but this was mainly driven by the government granting fresh import quotas to independent refiners that had to be utilised prior to the end of the year.

This in turn led to strong demand from the independent refiners for Russian crude, a grade that meets their quality requirements but also enjoys a considerable advantage because of the short journey time compared with crudes from the Middle East, Africa and the Americas.

But this dynamic may prove short-lived, unless Beijing grants more import permits for the new year.

The sharp rise in crude prices in September and October, with Brent futures LCOc1 hitting a three-year high of $86.70 a barrel on Oct. 25, may also dampen Chinese demand for December and January, as oil for delivery in these months would have been bought as prices were surging.

Despite the solid November outcome, crude oil imports are still down 7.3% in the first 11 months of 2021 compared with the same period last year, a reflection of the fact that refiners have been drawing on inventories in some months this year rather than paying to import fresh crude.

If crude imports have been soft for most of 2021, the same cannot be said for natural gas, with arrivals of both pipeline and liquefied natural gas (LNG) gaining 14.4% in November from October to 10.73 million tonnes.

Natural gas imports are up 21.8% in the first 11 months, reflecting strong demand for the fuel as China transitions more industry and residential heating away from more polluting coal.

However, coal imports were also strong, rising 30.1% from October to 35.05 million tonnes in November, the strongest month this year.

Demand for imported coal has been stoked by China’s domestic output being unable to keep pace with stronger demand for electricity, largely as a result of policies that saw some mines idled for safety checks.

With China boosting domestic coal output to near record highs in recent weeks, the demand for imported coal may moderate, especially once peak winter demand ends around February next year.

METALS RECOVER

On the metals side, iron ore imports had been slack in the second half of 2021 as steel demand moderated amid a general slowing in the construction and infrastructure sectors.

But November saw 104.96 million tonnes being cleared by customs, up 14.6% from October and the highest in 16 months.

This strong performance seems to be at odds with the softer steel outlook and may be a reflection of earlier buying by traders as iron ore prices fell sharply from their record high of $235.55 a tonne in May to under $100 at the start of November.

Unless steel demand is kicked higher by renewed stimulus measures by Beijing, it seems likely that iron ore imports will once again moderate in coming months.

A metal that may be enjoying a more sustained run of import growth is copper, with arrivals rising 24.3% in November to 510,402 tonnes, the most since March and a third straight monthly increase.

The industrial metal has seen increasing demand after being hit earlier by enforced closures or curtailments of some production because of power shortages.

The energy crunch appears to be largely resolved, and demand for copper has responded in turn.

Source: Reuters

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