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China commodity imports raise economic growth questions: Russell

China’s commodity imports for the first half of the year go some way to confirming what is already known about the state of the world’s second-biggest economy, and also offer some pointers for the rest of 2015.

Although the dynamics vary across the major commodities, there are some clear trends that have emerged in the first six months that point to a loss of economic momentum in China, the world’s largest importer of raw materials.

Iron ore offers the best example, showing that not even record low prices are enough to boost demand for the steel-making ingredient.

June imports were 74.96 million tonnes, up 5.8 percent from the prior month but only 0.5 percent higher than June last year.

First half imports totalled 452.9 million tonnes, a drop of 0.9 percent over the same period in 2014.

While June arrivals saw some increase from May, it’s worth noting that many of the cargoes that arrived in June would have been bought when spot iron ore .IO62-CNI=SI hit what was then a record low of $46.70 a tonne in early April.

While prices recovered somewhat from the April low, they were hammered again last week in the turmoil from China’s stock market slump, dropping to a fresh trough of $44.10 a tonne on July 8, before ending the week at $49.90.

The point is that even extremely weak prices didn’t spark buying interest from Chinese traders and steel mills, a sign that the demand for steel isn’t strong enough to justify buying iron ore.

Another clear trend from the first half is that Chinese steel exports are assuming more importance in the global market as mills try to sell excess output abroad.

Exports of steel products fell 3.4 percent in June from May to 8.89 million tonnes, but were still up 27.8 percent in the first half from the same period last year.

For the iron and steel sector, the first half of 2015 shows that those who believe China’s steel output has already peaked, such as the country’s industry association, appear to be winning out over those who believe the peak is still several years away, namely the iron ore miners.

What this likely means for the second half of 2015 is that any increase in iron ore imports can only come at the expense of further curtailment of domestic mines, and that means prices will have to remain low enough to force closures inside China.

GROWTH QUESTIONS

It’s also worth asking how China can hope to achieve a 7 percent economic growth target if steel output and apparent demand are basically flat.

The same question is also thrown up by trends in the copper sector, which is showing signs of weakness as well.

While steel is mainly used in building and infrastructure, copper’s use also extends into manufacturing, which is the lifeblood of China’s exports.

Imports of unwrought copper were 350,000 tonnes in June, down 2.8 percent from May to a four-month low. Imports for the first six months are down 11 percent over the same period in 2014.

There has been some displacement of unwrought copper imports by rising inbound shipments of copper ores and concentrates, which rose 11.6 percent in the first six months.

There is also the question of a drop in demand for copper for use as a financing vehicle in the shadow banking industry, but overall the picture remains one of soft demand.

On the surface crude oil presents a fairly positive demand picture, with imports of 29.49 million tonnes, or 7.18 million barrels per day (bpd) in June, up 26.9 percent from May and taking the gain in the first half of 2015 to 7.5 percent over the same period in 2014.

However, much of the increase in imports is flowing into strategic storage, with an estimated 41 million barrels going into stockpiles in the first five months of the year, according to Reuters calculations.

If the same pace continued in June, it implies that about 325,000 bpd of oil went into strategic storage in the first half of the year, out of imports of 6.59 million bpd. This eats up about two-thirds of the 7.5 percent gain, meaning growth in actual consumption has been soft so far in 2015.

Overall, the imports of the major commodities most associated with economic growth in China are, if anything, weaker than the gross domestic product numbers suggest they should be.

If China’s economy is going to post a stronger second half, an early indicator will be renewed strength in commodity imports, perhaps more so that any further monetary stimulus measures.
Source: Reuters