LAUNCESTON, Australia, (Reuters) - China’s imports of major commodities are holding up well, according to market consensus, but that in itself is quite concerning for the overall state of the world’s second-biggest economy.
Commodities are often viewed as the canary in the coal mine, with falling demand a sign of economic troubles ahead. Likewise, consumption of natural resources should pick up ahead of a more general recovery.
The fact commodity imports haven’t weakened does allow some of the more alarmist views of China’s economy to be discounted.
But equally, the absence of a resurgence in imports means any significant, infrastructure-led recovery is not yet on the horizon, even if it is coming, as is the widely-held conviction.
“July commodity imports held up,” was how Barclays headlined a report on China’s trade data, while London-based consultancy Capital Economics said, “Commodity imports hold up well.”
These were just two of several reports that struck similar notes, although many analysts also questioned whether those commodities exhibiting strength in imports are doing so because of underlying demand in China, or for other reasons.
Crude oil imports, for instance, rose to 30.71 million tonnes in July, a gain of 4.1 percent on the prior month and 29.3 percent higher than in the same month a year ago.
For the first seven months of 2015, crude imports have jumped 10.4 percent, according to customs data.
On the surface this looks like a strong reading, but there are two factors at work that undermine the view that China’s fuel demand is robust.
First is that exports of refined fuels are up 8.6 percent in the first seven months of the year over the same period in 2014, meaning some of the additional crude being imported is simply being shipped back out in the form of products.
Crude imports in the first seven months of 2015 were about 6.68 million barrels per day (bpd), or about 630,000 bpd more than for the same period last year.
Refined product exports have increased about 52,000 bpd to about 616,000 bpd over the same period.
This leaves a gain of about 578,000 bpd once the rise in product exports is taken into account, and about half of this is believed to have flowed into strategic and commercial storage.
China doesn’t disclose flows into its newly-built strategic reserves, but based upon the available capacities of recently commissioned tanks, as much as 300,000 bpd has been stored in the first seven months of the year.
This would mean overall domestic fuel demand growth is closer to 278,000 bpd, a far more modest outcome than the headline numbers suggest, and also one that fits with a Chinese economy struggling for momentum.
It’s the same with iron ore, with July’s 14.9 percent jump in imports from June more likely the result of restocking by steel mills taking advantage of near-record low spot prices.
Even July’s strong import figure couldn’t drag the year-to-date figure into the black, with imports still down 0.1 percent in the first seven months of the year.
As with oil, some of the iron ore is simply being exported as steel products, for which outbound shipments rose 9.4 percent in July from June, with year-to-date exports up 26.6 percent.
With copper, imports of ores and concentrates have risen 10.9 percent in the first seven months, but this strength is offset by a 9.5 percent drop in imports of unwrought metal.
Chinese copper smelters are increasing output and this is lessening the need for imports of refined metal, and the overall picture is once again one of steady demand.
And relatively steady demand for major commodity imports doesn’t gel with China’s stated gross domestic product (GDP) growth of 7 percent, even allowing for a rotation more towards services and consumer demand.
Certainly it’s hard to see how China can maintain that growth rate over the whole of 2015 without some acceleration in spending on infrastructure and construction, as well as on improvements in industrial output.
For China’s GDP to meet the official 7 percent target, commodity imports will have to do more than just “hold up” for the rest of the year, they will have to accelerate and be used for consumption, not for inventory building or re-export as mildly beneficiated products.
(Clyde Russell is a Reuters columnist. The views expressed are his own.)
Editing by Tom Hogue