LAUNCESTON, Australia: Energy over metals, raw over refined, sums up the likely theme for China’s commodity demand next year.
Commodity markets had become accustomed to China as a voracious consumer of resources, but 2012 showed that growth rates can slow, a trend likely to continue next year, but it won’t be evenly spread.
The broad macro-economic situation as the new year begins should provide guidance as to where the likely winners lie for 2013.
Recent economic data suggest that China is regaining growth momentum and this is being led by infrastructure spending and consumer demand, and less so by the traditional powerhouse of exports of manufactured products.
This isn’t really much of a surprise as the Chinese authorities have been clear they want a more consumer-led economy over the longer-term.
And over the shorter-term, infrastructure spending is the quickest way for large state-owned enterprises and governments to quickly boost activity after the economy slowed a little more than anticipated in the middle of 2012.
Consumer spending in China tends to mean more vehicles as personal transport is still an aspiration for the ever-growing middle class, with car sales rising 6.9 percent in the year to end-October. This alone will boost China’s fuel use, but it’s not refined products that are the likely big winner in 2013, it will be crude demand.
China has been commissioning new refinery units at a rapid pace, with more than 1 million barrels per day (bpd) expected to be added in 2012, and a further 600,000 bpd planned for this year. China’s refinery throughput hit a record 10.13 million bpd in November, but it’s unlikely that actual fuel consumption is quite as high.
What appears to have been happening is that the Chinese have been rebuilding product stockpiles that were run down in the period of midyear weakness.
However, what happens when inventories are at comfortable levels will be key for the outlook.
The Chinese will either cut runs to closer to actual demand, or start exporting refined products.
The first is still positive for crude imports, as actual demand will be close to 9.8 million bpd in 2013, according to International Energy Agency forecasts.
Given domestic crude production of about 4 million bpd, this means monthly crude imports will have to average at least 5.8 million bpd, about 400,000 bpd more than the average for the first 11 months of 2012.
This could be further boosted by small refiners obtaining licenses to directly import crude, rather than using fuel oil as a feedstock. If the Chinese do decide to export more products, crude imports will be even higher.
Even if they don’t run their refineries close to capacity, it’s still likely that the Chinese will import less refined fuels, thus putting downward pressure on regional cracks.
Of course, China doesn’t operate in isolation and profits for Asian refiners may come under further pressure as India exports more products and Japan buys less fuel oil for power generation as its nuclear fleet is re-commissioned.
It’s also likely that additional crude demand will be biased toward heavier grades as this is what much of the new refinery capacity in China and India is geared to process.
This means the trend for the premium of Brent over Dubai may be toward narrowing over 2013, reversing its recent widening that has taken it to $ 5.17 a barrel, more than three times its 2012 trough of $ 1.50.
If the trend in energy is for the crude over refined, the same may well be true for metals.
— Clyde Russell is a Reuters market analyst.
The views expressed are his own.
Iron ore was in some ways the surprise performer of 2012, as Chinese imports of the steel-making ingredient were resilient despite the slowdown in economic activity that happened in the middle of the year.
They also ended the year strongly after the price of spot iron ore plummeted more than 20 percent in the third quarter as the market feared the Chinese slowdown would do more than just dampen steel demand.
But iron ore imports are up more than 8 percent in the year to November, beating a Reuters consensus forecast made at the end of 2011 for a 6 percent gain in 2012.
What became apparent is that steel mills will rather keep importing iron ore but cut purchases from high-cost, low quality domestic mines.
Given global iron ore capacity may expand only moderately in 2013 as the big projects are likely to come on line in subsequent years, and Indian exports are likely to fall further, there is every chance that iron ore will remain well supported.
This is despite the likelihood of global steel capacity remaining strongly in surplus, meaning the steelmakers are likely to suffer from weak margins, even if demand does pick up with stronger conditions in China, and perhaps even in Europe.
It’s the same for aluminum, where chronic overcapacity is compressing profits, but Indonesia’s restrictions on exporting raw ores has made the bauxite market structurally short.
China’s bauxite imports have halved in recent months compared with the same period last year and are down 8 percent in the year to October.
The shortage of bauxite has boosted alumina, the intermediate stage in making aluminum, with imports up 176 percent in the year to October.
Given China is unlikely to idle much aluminum capacity on a net basis in 2013, demand for bauxite and alumina is poised to remain robust.
— Clyde Russell is a Reuters market analyst. The views expressed are his own.
