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China commodity trade data show winners are scarce: Russell

China’s detailed commodity trade figures for 2014 do much to confirm that the trend has changed to higher import volumes being dependent on lower commodity prices, but there are a few notable exceptions.

Major commodities such as crude oil, iron ore and copper all showed increased imports on the back of falling prices, illustrating the changed dynamic in commodity markets whereby supply became the dominant driver of prices.

Taking away the temporary impact of the 2008 global financial crisis on China’s commodity demand, the trend for the last 10 years had been demand-led increases in both prices and volumes of imports.

In 2014 that changed as many commodities moved into structural oversupply, meaning prices fell even as Chinese demand increased.

China imported 13.7 percent more refined copper in 2014 from a year earlier, with prices being 8 percent lower in December 2014 than the same month in 2013, according to customs data.

In crude oil, China brought in 9.5 percent more in 2014, and iron ore imports jumped 13.9 percent, with the prices of both these commodities plunging during the year.

Only coal among major commodities saw falling imports amid lower prices, with inbound volumes dropping 14.7 percent in 2014 from a year earlier.

Coal’s woes are probably related to China’s efforts to clean up pollution and new regulations aimed to improve the quality of imported coal.

However, while there were a few commodities where volumes increased as did prices, and these are the real winners in the story of Chinese demand for natural resources.

COFFEE, BAUXITE ARE WINNERS

After several years in the doldrums, last year was a strong one for the raw materials used to make aluminium, namely bauxite and alumina.

Alumina imports surged 37.7 percent to 5.27 million tonnes in 2014, while the price reported by Chinese customs in December last year was $382.34 a tonne, up from $364.97 in December 2013.

Bauxite imports dropped by 48.3 percent to 36.28 million tonnes, but this has to be viewed in the context of the massive 78.7 percent jump in 2013 as Chinese aluminium smelters stocked up ahead of Indonesia’s ban on exports, instituted in January 2014.

The price paid for bauxite in December 2014 was $58.57 a tonne, up from $55.32 in the same month a year earlier.

What alumina and bauxite also show is that the relative winners in the commodity space can also shift quite quickly.

The major beneficiary from Indonesia’s decision to ban the export of raw ores would appear to be Australia, which boosted exports of bauxite to China by 9.5 percent to become China’s top supplier.

For nickel ore, another commodity affected by the Indonesian ban, the big winner was the Philippines, which overtook its Southeast Asian rival as China’s biggest supplier, boosting its exports by 22.7 percent, while also receiving higher prices.

Another winning commodity was coffee, with Chinese imports growing by 36.5 percent in 2014 from 2013, and the price paid in December last year jumping almost 15 percent from the same month a year earlier.

The strong gain in imports came despite China’s domestic coffee output also rising, although much is exported to Europe for use in blending.

While coffee prices may decline this year on improved crops from major producers such as Brazil, the outlook for Chinese demand remains robust as the beverage becomes more popular in the traditionally tea nation, and as the emerging middle class seeks better quality coffee.

Coffee, along with bauxite, alumina and nickel show that the place to be in meeting China’s commodity needs is where there is strong demand growth coupled with constrained supply.

This is a better position than most of the major commodities are in, where demand remains robust, but only because prices are low.

If crude oil suddenly jumped from its current levels around $48 a barrel for Brent to closer to $80, then it’s likely that Chinese imports would soften, as much of the current demand is heading into storage tanks.

It’s the same story for iron ore, any significant rise in price will bring about a concomitant drop in Chinese demand.

While bauxite’s and alumina’s strong run of 2014 may be repeated again, the trick will be to find the next commodities where Chinese demand will increase, even if prices go up as well. Source: Reuters