If the numbers don’t always add up, one fallback is to Google an explanation.
At least, this is what the Wall Street Journal says that research firm Sandford C Bernstein has been doing, in its search for a clearer u derstanding of China’s demand for oil. Their analysts have allegedly been using images from Google Earth to calculate the capacity of the new storage facilities being installed on the ground in China.
Here at WiC we can’t decide if this is commendably enterprising or just rather desperate. But the eyes-inthe- sky in New York, like many China watchers, are looking for answers to a series of questions. Why are iron ore imports up 25% in year-to-date terms when steel production has remained essentially flat? Why would coal import volumes be bursting off the charts when power generation has actually declined?
The consensus is that China has been stocking up on commodities to an unprecedented degree. Import volumes this year are often exceeding those of the more recent boom times.
It’s not just ore, oil and coal. Copper volume is up over 90% in year-on-year terms. Aluminium and zinc imports are at three-year highs. Brazilian soybean farmers are a lot more cheerful than they were a few months ago too.
So why the hurry to hoard? Clearly, the Chinese are taking the chance to stock up while prices are lower. The country still has years of economic growth and urbanisation ahead of it, so what might be surplus to requirements right now is unlikely to go to waste in future.
There may also be a desire to spend some of the US dollars currently burning holes in their pockets. It’s better to hold real assets rather than financial ones, goes the argument, especially if you expect to see the dollar decline. Commodity prices often increase when the dollar falls too, so why wait?
But the different commodities are also being hoarded for different reasons. For oil, the government policy has been laid out in detail and the creation of a strategic reserve has been going on for some time (see WiC6).
In fact, Beijing announced last week that the initial phase of stockpiling was complete and that China now holds 100 million barrels (about 30 days of imports). The next step is to build storage tanks for 180 million more.
Booming imports of coal (up 168% in April on a year earlier) represent changing purchasing practices, as much as a stockpiling strategy. Utility firms are buying more coal from overseas, especially as they try to negotiate lower prices from domestic producers. The Global Times also thinks that domestic supply may narrow over the summer as the government tightens safety regulations in the lead up to the 60th anniversary in October of the People’s Republic’s founding.
Stocking of foreign iron ore – the commodity of the moment in terms of Chinese press coverage – is also being influenced by the low quality of domestic production (and its high price), says the Maritime Global News.
But negotiations between Chinese steel producers and the international ore suppliers are also a factor, with the Chinese still refusing to accept a forward contract price. If they are really going to play hardball, they may have to fall back on accumulated supply – as well as the spot market – to remain at the ne-gotiating table and achieve the 40% price cut they want.
The accelerated purchasing of commodities has been terrific news for the natural resources sector (and the Aussie dollar) at a time when demand elsewhere remains beleaguered.
Dry-bulk shippers are also delighted. Cape size ships which were hiring out at a little under $3,000 a day when the Baltic Dry Index hit its lows last December were fetching $93,000 last week.
But more widely, the partial recovery in commodities is also being held up as canary-in-the-mine evidence of global economic resilience. Yet it may be difficult to sustain the same momentum if the hoarding strategy is discontinued.
Terry Fanous, a vice-president at Moody’s, says China’s stockpiling and replacement of domestic production with higher-quality imports has supported the recent rally in prices for many base metals.
But he thinks that a sustainable turnaround in demand needs to see a deeper recovery amongst the economies of the US, Europe and Japan too.
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