Commodities | May 13 2009
By Chris Shaw
April trade data out of China show continued strong domestic demand for commodities, Barclays Capital noting imports of copper, soybeans, iron ore and crude oil are respectively up 62%, 55%, 33% and 14% from the same month a year ago. The increases mean imports of iron ore and copper have easily hit new all-time highs.
In the group’s view this buying by China has been the key to limiting what could otherwise have been a huge build up in global surpluses, rising inventories and lower prices. Barclays also points out nowhere else in the world in recent months has there been any noticeable recovery in commodities demand.
With the strong buying from China prices for these commodities, and copper and soybeans in particular have pushed higher, the question now in the group’s view is whether the trend in imports and the corresponding increase in prices is supportable going forward?
To try and determine an answer Barclays has examined the factors driving China’s import growth in recent months, its conclusion being the nation’s de-stocking process appears to have both begun and finished earlier than elsewhere in the world.
China’s copper imports began declining in the June quarter last year, buying of soybeans and iron ore began falling in the December quarter and in January respectively and adjustments in the oil market flowed through in the March quarter of this year.
Barclays believes the introduction of the Chinese government’s fiscal stimulus package has clearly helped turn around demand as re-stocking has become the key factor in driving imports higher in the past couple of months. This is especially the case given China’s commodity output is falling in the case of iron ore, flat with respect to both soybeans and crude oil, and not growing fast enough to meet demand in the copper market.
As well, the Chinese government has made it clear it intends to take advantage of lower prices to build up strategic reserves in some commodities, with the moves in both copper and soybeans equating to about 3% of global supply on Barclays’ estimates.
The risk then is when this re-stocking process has been completed China’s import demand will weaken. Given there is little demand growth elsewhere in the world at present, nothing appears likely to take up the slack. As the analysts points out, such an outcome implies commodities prices are likely to weaken if Chinese demand falls.
But as Barclays notes, such a scenario is a shorter-term outcome as China remains resource scarce and domestic output of key commodities simply cannot keep pace with future demand growth. This suggests in the longer-term the China story with respect to upward pressure on commodity prices remains intact, even if prices decline in the June and September quarter as the current pace of Chinese imports eases.
