Chinese pullback raises doubts over commodities
By Leslie Hook in Beijing
Those who believe the commodities bull market has run its course could do worse than cite China. For the world’s biggest buyer of everything from cotton to iron ore, it has been an unusually quiet year. Imports of some raw materials have actually fallen, confounding expectations that strong demand would drive prices even higher.
Copper is a good example. Chinese imports of refined copper were down 25 per cent from January to May compared with the same period of last year. Ivan Glasenberg, chief executive of Glencore, the world’s largest commodities trader, neatly captured the mood this month when he said: “We see a pullback in China and it will continue.”
Although Mr Glasenberg also cautioned that the slowdown in imports would probably be short-lived, his comments have triggered an intense debate in the markets over whether Chinese demand is really slowing down or whether the country, after stockpiling raw materials last year, is simply running down its inventories.
China’s voracious appetite has been an important influence on commodities prices. Thus, the scale of any pullback can be expected to shape not just the outlook for commodities such as copper, oil, cotton and iron ore, but the share price performance of mining and oil companies, including BHP Billiton, Valeof Brazil and ExxonMobil.
Commodities traders and analysts say the drop in China’s imports is due to a number of factors, including credit tightening, slower economic growth, higher domestic production for a handful of raw materials, and a move to run down inventories. But they disagree on how much weight to attach to any one of these factors.
As the stimulus package China launched in late 2008 winds down and Beijing steers the economy away from heavy industry, demand growth for commodities and electricity is indeed slowing. Tight credit conditions have also made it harder to borrow money to import commodities. The cash-strapped atmosphere across the country, combined with high global prices for most raw materials, makes it less attractive to hold large stocks of commodities.
New bank loans are down 12 per cent this year compared to last year, and the government has hiked interest rates four times since October in an effort to control inflation.
The International Monetary Fund has forecast Chinese economic growth will slow this year to 9.6 per cent, down from 10.3 per cent last year. It sees the slowdown continuing in 2012, with economic growth moderating to 9.5 per cent.
Yet, China’s growth rate, even if slower than last year, remains healthy. Moreover, there are signs that Chinese companies still predict strong demand ahead. But amid economic uncertainty in the US and as the sovereign debt crisis in Europe intensifies, they have opted to run down their stocks rather than import more.
Stocks of thermal coal, used to fire power stations, are among those to have been drawn down. At a cluster of seaports near Tianjin, coal stocks peaked in February and have been falling since, according to data from the Qinhuangdao Seaborne Coal Exchange. Lin Fuxia, a coal trader at Hangzhou Cogeneration Import and Export, says: “Current stockpiles are not high. Lots of port warehouses are empty.”
The situation in base metals is similar. Imports have slowed markedly since January, but inventories have also fallen. That, some believe, is a sign that underlying demand remains robust. Shanghai copper inventories fell to 350,000-400,000 tonnes by the start of June, down from 600,000-700,000 tonnes in mid-March, says Barclays Capital. Even in aluminium, of which China has traditionally been a net exporter, stocks in Shanghai have fallen to 270,000 tonnes from 443,000 tonnes at the start of the year.
Analysts say the drawdown in inventories is unlikely to be long-lasting. After the summer, usually a slack season for Chinese commodity trading, the market is likely to discover the actual strength of demand for raw materials. “China will have to come back,” says Ric Deverell, head of commodities research at Credit Suisse in London.
It would not be the first time that China has taken a step back from the market, bringing prices down with it, only to reappear with renewed appetite a few months later.
China’s growth rate, even if slower than last year, remains healthy. Moreover, there
are signs that Chinese companies still see strong demand ahead.
Those who believe the commodities bull market has run its course could do worse than cite China. For the world’s biggest buyer of everything from cotton to iron ore, it has been an unusually quiet year. Imports of some raw materials have actually fallen, confounding expectations that strong demand would drive prices even higher.
Copper is a good example. Chinese imports of refined copper were down 25 per cent from January to May compared with the same period of last year. Ivan Glasenberg, chief executive of Glencore, the world’s largest commodities trader, neatly captured the mood this month when he said: “We see a pullback in China and it will continue.”
Although Mr Glasenberg also cautioned that the slowdown in imports would probably be short-lived, his comments have triggered an intense debate in the markets over whether Chinese demand is really slowing down or whether the country, after stockpiling raw materials last year, is simply running down its inventories.
China’s voracious appetite has been an important influence on commodities prices. Thus, the scale of any pullback can be expected to shape not just the outlook for commodities such as copper, oil, cotton and iron ore, but the share price performance of mining and oil companies, including BHP Billiton, Valeof Brazil and ExxonMobil.
Commodities traders and analysts say the drop in China’s imports is due to a number of factors, including credit tightening, slower economic growth, higher domestic production for a handful of raw materials, and a move to run down inventories. But they disagree on how much weight to attach to any one of these factors.
As the stimulus package China launched in late 2008 winds down and Beijing steers the economy away from heavy industry, demand growth for commodities and electricity is indeed slowing. Tight credit conditions have also made it harder to borrow money to import commodities. The cash-strapped atmosphere across the country, combined with high global prices for most raw materials, makes it less attractive to hold large stocks of commodities.
New bank loans are down 12 per cent this year compared to last year, and the government has hiked interest rates four times since October in an effort to control inflation.
The International Monetary Fund has forecast Chinese economic growth will slow this year to 9.6 per cent, down from 10.3 per cent last year. It sees the slowdown continuing in 2012, with economic growth moderating to 9.5 per cent.
Yet, China’s growth rate, even if slower than last year, remains healthy. Moreover, there are signs that Chinese companies still predict strong demand ahead. But amid economic uncertainty in the US and as the sovereign debt crisis in Europe intensifies, they have opted to run down their stocks rather than import more.
Stocks of thermal coal, used to fire power stations, are among those to have been drawn down. At a cluster of seaports near Tianjin, coal stocks peaked in February and have been falling since, according to data from the Qinhuangdao Seaborne Coal Exchange. Lin Fuxia, a coal trader at Hangzhou Cogeneration Import and Export, says: “Current stockpiles are not high. Lots of port warehouses are empty.”
The situation in base metals is similar. Imports have slowed markedly since January, but inventories have also fallen. That, some believe, is a sign that underlying demand remains robust. Shanghai copper inventories fell to 350,000-400,000 tonnes by the start of June, down from 600,000-700,000 tonnes in mid-March, says Barclays Capital. Even in aluminium, of which China has traditionally been a net exporter, stocks in Shanghai have fallen to 270,000 tonnes from 443,000 tonnes at the start of the year.
Analysts say the drawdown in inventories is unlikely to be long-lasting. After the summer, usually a slack season for Chinese commodity trading, the market is likely to discover the actual strength of demand for raw materials. “China will have to come back,” says Ric Deverell, head of commodities research at Credit Suisse in London.
It would not be the first time that China has taken a step back from the market, bringing prices down with it, only to reappear with renewed appetite a few months later.
China’s growth rate, even if slower than last year, remains healthy. Moreover, there
are signs that Chinese companies still see strong demand ahead.
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