Regional News
The world’s biggest consumer of key commodities is on a diet.
The latest trade data shows imports holding up in September; the volume of major commodity imports was little changed from August. But standing back from the monthly detail, 2011 isn’t a strong year. Imports of copper and soybeans have fallen from 2010. Growth in oil imports is sharply down.
There could be worse to come. Overcapacity in the real-estate sector at home and fading demand for Chinese goods abroad, with exports falling for a second month in September, suggest tough times ahead.
Panic isn’t called for yet. China’s economy isn’t about to grind to a halt: Most economists are forecasting gross domestic product will increase by around 9% in 2011 and 8% in 2012. But even a moderation in growth is troubling for global commodity markets, which assume Chinese demand will continue to rise fast.
The International Energy Agency forecasts Chinese demand for oil will grow by 5.2% in 2012. With oil imports in the first three quarters of 2011 up just 4%, GDP growth expected to slow in 2012 and Beijing’s 12th five-year plan calling for a reduction in energy use per unit of GDP, that looks optimistic.
Cut the IEA’s forecast by two percentage points and global oil-demand growth would fall by 200,000 barrels per day, equivalent to 15% of the increase currently forecast. With supply set to increase once Libya becomes more stable, any increase in oil going to inventories will pressure high-flying Brent crude prices in particular.
Similarly, in a dismal earnings report this week, Alcoa said it expects aluminum demand to grow slowly in the second half. But even that forecast relies on Chinese consumption increasing 10% to offset declines in key Western markets.
Commodities producers can’t rely on the sort of shock-and-awe stimulus that boosted Chinese demand in 2009. High inflation and the burden of debts taken on by local government both reduce Beijing’s scope for another splurge.
The government appears genuinely committed to building more affordable housing. Work on 98% of the 10 million affordable homes planned for 2011 has been started and another 10 million units are planned for 2012. But this only offsets a slowdown in private development.
Commodities bulls will note that China is a strategic consumer and lower prices may tempt buyers there to snack on bargains. There are signs that may already be happening in the copper market, where prices have rebounded slightly from lows close to $3 a pound early in the month.
Also, the increase in China’s demand for commodities like soybeans is driven by rising incomes and demand for a high protein diet. That kind of structural growth is unlikely to be dented too much by cyclical shifts in exports and real estate.
But for industrial materials, the prospect of a cyclical downturn in Chinese demand in the months ahead is real. After years of enjoying the spectacle of China gobbling up resources at an accelerated pace, commodities bulls will turn queasy at signs of a reduction in appetite.
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By: Thomas Orlik
Source: The Wall Street Journal, October 14, 2011
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