--Clyde Russell is a Reuters market analyst. The views
expressed are his own.--
By Clyde Russell
LAUNCESTON, Australia, March 11 The reaction of
commodities to the Chinese trade data show that sentiment and
fundamentals are diverging, with the fear trade winning so far.
No matter which way you try and slice and dice it, China's
imports of commodities in the first two months of the year have
been surprisingly strong.
But the market has chosen rather to focus on the February
slide in merchandise exports from the world's second-biggest
economy, concluding that all isn't well and therefore commodity
imports will tumble in the coming months.
Add to this the view that much of the strength in imports of
copper and iron ore was related to accessing financing rather
than underlying demand, and suddenly you can turn large gains in
imports into something negative for future demand.
The issue is whether the market is reading it correctly and
the outlook for Chinese commodity demand is weak, or whether a
more modest pullback in import growth is likely in the months
Much will depend on the state of the overall economy, and
here the risk is that the 18.1 percent drop in exports in
February from a year earlier is a harbinger of bad economic
While the Lunar New Year, which started in late January but
was mostly in early February, shouldered much of the blame for
the disappointing export numbers, it's worth noting that exports
for the first two month of 2014 were still 1.6 percent below
that for the same period last year.
This does fit with recent softness in both the HSBC and
official Purchasing Managers' Indexes, but so far the economic
numbers are far from catastrophic.
The export numbers also showed a rise of 1.3 percent in the
value of shipments to the United States and a gain of 4.6
percent for the European Union in the first two months of the
year, indicating recovery in demand from the developed
What does this mean for commodity import growth in the next
Taking metals first, and iron ore imports were 63.16 million
tonnes in February, up 11.9 percent from the same month last
year, but down 37.5 percent on January's record high.
Taking the first two months together, iron ore imports were
up 21.8 percent over the same period last year.
The concern is that iron ore has joined copper in being used
for financing, and that this type of demand is unsustainable. It
will also result in a build-up of inventories, and given steel
demand isn't roaring ahead, the fear is that imports will plunge
in coming months.
However, steel output rose to 2.08 million tonnes in the
last eight days of February, a 5.9 percent rise over the prior
Steel inventories also shrank by 5.9 percent, although they
remain near record highs.
While the outlook for steel demand growth in 2014 remains
uncertain, with the consensus for a modest increase, there still
doesn't seem enough in the recent data to justify the massive
10.4 percent slump in Asian spot iron ore prices in the past two
IRON ORE PLUNGE OVERDONE?
Iron ore .IO62-CNI=SI is down 22 percent so far this year,
and at $104.7 a tonne on March 10 is the lowest in nearly 18
Since the 2008 global financial crisis, large declines in
the price of iron ore have usually been followed by higher
Chinese imports of the steel-making ingredient, as buyers take
advantage of cheaper prices but also as high-cost domestic
producers are forced to cut output.
Turning to crude oil, imports were 6.01 million barrels per
day (bpd) in February, up 11 percent from the same month in
2013, but down from the record 6.63 million bpd in January.
Imports averaged 6.36 million bpd in the first two months of
this year, up a strong 11.5 percent on the same period last
year, again hardly a sign of an economy about to hit the wall.
Crude imports have been boosted by the start-up of two new
refineries with a combined capacity of 440,000 bpd, as well as
some rebuilding of commercial inventories.
But it also is likely underlying demand hasn't been as soft
as feared, given the new refining capacity has yet to result in
increased exports of fuels, with outbound product shipments
actually dropping 7.7 percent in the first two months of the
year compared to the same period in 2013.
The plunge in exports in February was certainly the headline
news from China's trade data, but it doesn't tell the whole
The Chinese government remains committed to achieving
economic growth of 7.5 percent in 2014, although it's more
flexible on the target than in past years.
With developed world economies also starting to show signs
of sustainable economic recovery, it may be premature to bet
that China's growth in commodity imports this year will slow as
dramatically as suggested by the plummeting iron ore price.
(Editing by Muralikumar Anantharaman)