LAUNCESTON, Australia: Can the disappointment over China’s softening commodity demand in April be simply washed away with a few comments that the authorities intend to bolster infrastructure spending?
It would seem simplistic to think so but commodity prices have generally responded favorably, or for the most part stopped declining, after a state-backed newspaper said the world’s largest commodity buyer will fast track project approvals.
The exception so far is iron ore, with spot prices dropping for a 10th consecutive day on Monday. They are now 12.4 percent off their highest for 2012.
Copper has gained 1.7 percent in recent days and Brent crude is up by a similar margin, so at best it’s been a cautious response to China’s plans to spur growth, as well as hopes a European summit can go some way to solving that region’s financial woes.
For once, investors may be getting it right by being restrained, instead of the more normal swings from boom to gloom and back again that have characterized market moves since the 2008 global financial crisis.
While the recent sell-off on the back of perceived weakness in China’s April commodity trade data may have been overdone, it’s likely that numbers will be soft for some months to come as it will take at least two quarters to turn around China’s demand.
Like any large economy, China will take some time to ramp up stimulus, and the process is unlikely to be even.
A common metaphor for big economies is that they are like supertankers; hard to stop once they getting going, even harder to get going from anchor and difficult to change direction.
An alternative metaphor for China used by an analyst at a major Australian bank is that China is more like a flotilla of small ships, getting them all to sail together and in the same direction is the challenge.
No matter what your preferred metaphor is, the message is the same: China is unlikely to grow its commodity demand much until at least the third quarter.
In some ways this isn’t surprising, and probably the softness in the April numbers shouldn’t have been unexpected either, for it was known that China’s industrial production and Purchasing Managers’ Indexes had been trending downward for several months.
In fact, the most surprising thing so far about China and 2012 is that commodity demand was as strong as it was in the first quarter.
Refined copper imports were 40 percent higher in the first quarter from the same period last year, and despite slowing in April, the first four months of 2012 actually increased, jumping 76 percent gain over the same period last year.
Iron ore imports were up 5.6 percent in the first quarter, and by 6.5 percent in April over the first four months of 2011, despite the actual volume slipping in April to 57.68 million tons, the lowest since October.
Crude oil imports gained 11.3 percent in the first quarter, with April’s year-on-year increase easing slightly to 9.3 percent as volumes dropped to 22.26 million tons, the lowest since November.
It’s worth pointing out that January, February and March were three of the four strongest months on record for oil imports and April’s number was above every month in 2011 bar November.
So, if you look at the year-on-year comparisons for China’s imports of major commodities, they don’t look nearly as bad as taking April’s figures in isolation.
But April more than likely heralds a period of weaker growth rates for commodity imports, that will last for several months until the stimulus kicks in.
Towards the end of last year, many analysts expected a soft first quarter for China’s commodity demand.
They didn’t get it, but they will likely get a weak second quarter, especially for iron ore and copper as stockpile overhangs are cleared.
But whether investors will see through the current softness to stronger demand in toward the end of the year is questionable, it’s likely that prices will be hostage to headlines with fundamentals playing second fiddle.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
© 2024 SAUDI RESEARCH & PUBLISHING COMPANY, All Rights Reserved And subject to Terms of Use Agreement.