China economic stimulus may do little for commodities

Clyde Russell Reuters columnist It used to be a fairly safe bet that weak Chinese growth numbers would spark government stimulus measures, thereby boosting commodity import demand and prices. While the soft first quarter gross domestic product (GDP) numbers may well result in a relaxation of monetary policy and measures to boost infrastructure spending, it’s also likely that commodity volumes and prices won’t respond much. GDP rose 7 percent year-on-year in the first quarter, in line with forecasts but still the slowest rate in six years. But in many ways China doesn’t really look like an economy growing at 7 percent, with exports plunging in March, power generation dropping 3.7 percent, the biggest fall since 2008, and a host of other indicators pointing to sluggish growth. The National Bureau of Statistics remains confident that China will meet its GDP growth target of 7 percent for the whole of 2015, and also pointed out in comments after yesterday’s GDP numbers that there is plenty of scope for increased infrastructure investment. Normally these sort of comments would be music to the ears of iron ore, copper and coal miners, as well as oil and gas producers. But there are a number of reasons that suggest that even increased spending may not result in any significant gains in commodity demand, and therefore prices. The situation is different for each of the major commodities that China imports, but there are some common themes. The main one is oversupply, and this applies mainly to iron ore, coal and to some extent crude oil. Among the swathe of data released yesterday was news that steel output fell 1.2 percent in March from a year earlier, taking the decline in the first quarter to 1.7 percent. This hardly bodes well for iron ore demand, meaning that imports will only rise by taking market share from domestic output, something that has been happening. Iron ore imports jumped 18.5 percent in March from February, and are up 2.4 percent in the first quarter. No doubt this is being helped by the slide in spot prices, with the index at US$50.10 a tonne on Tuesday, just above the record low of US$46.70 earlier this month. Prices are down nearly 30 percent so far this year, and are just more than a quarter of what they were four years ago when several major mining companies decided to dramatically increase output in the belief that Chinese demand would continue to rise. If steady steel output is assumed for the rest of 2015, iron ore import volumes will largely depend on prices remaining low enough to ensure domestic supplies continue to leave the market. Although nothing has been announced officially, there appears to be concern among the Chinese authorities and steel companies that low prices will entrench the dominance of the major global miners, something that China has railed against in the past. This raises the prospect of some kind of support for the domestic iron ore industry, which may limit growth in import volumes. Storage driving oil, copper Similar to iron ore, crude oil import volumes have held up well in the first quarter, rising 7.5 percent to 80.34 million tonnes, or about 6.52 million barrels per day (bpd). But this strength in imports is potentially misleading as it’s likely that as much as 420,000 bpd was flowing into strategic and commercial storage, given the difference between crude available from imports and domestic output and refinery processing. Taking away the likely flow into storage leaves China with only a modest increase in oil consumption in the first quarter, which tallies with weakness seen in industrial production growth. While stimulus measures may boost oil consumption, it’s highly unlikely that this would be enough to increase global oil prices. Much more likely is that a reduction in oil purchased for stockpiling will put downward pressure on prices. China’s copper demand may be a beneficiary of stimulus spending, but it’s worth noting that the nature of copper imports are changing, with more ores and concentrates being shipped in and less refined metal. This shows the build-up of smelting and refining capacity inside China, which may be negative for the outlook for refined copper prices. But once again the real driver of China’s appetite is likely to be how much of the metal is bought for stockpiling rather than consumption. Coal imports dropped 41.5 percent in the first quarter from the same period last year, and weaker thermal power generation is only part of the explanation. China’s domestic producers are fighting to ensure they get a higher share of the coal market, which is also under pressure from efforts to reduce pollution. Overall, the picture for commodities is that even if the Chinese authorities decide to stimulate the economy by boosting traditional drivers such as infrastructure, manufacturing and housing construction, there’s no guarantee this will flow through in a meaningful way to imports. Reuters