CLYDE RUSSELL: China’s imports of major commodities reflect mixed economic data

China’s imports of major commodities presented a mixed picture in May, with strength in crude oil and iron ore being offset by weakness in copper and signs of a peak in coal.

The overall performance is suggestive that commodity imports are starting to exhibit the same unevenness that has characterised the recovery in the world’s second-largest economy after Beijing ended its strict zero-Covid-19 policies that had put a straitjacket on growth in 2022.

Crude oil was the standout performer in May, with imports rising to the equivalent of 12.11-million barrels per day, up from 10.32-million in April and just behind the 12.32-million from March, which was the highest since June 2020.

The stronger performance was largely driven by refiners coming back from scheduled maintenance and increasing throughput to build up inventories ahead of the peak summer demand season.

There was also likely an element of the anticipation of stronger demand as the economy reopens, though whether this materialises remains to be seen, given the mixed picture of recent economic data.

Given the lag between when crude cargoes are arranged and physically delivered can stretch to as much as three months, the May oil imports are a reflection of what refiners anticipated, rather than actual demand conditions.

This raises the possibility that crude imports may ease slightly in coming months as refiners became more cautious on the economic outlook, and after prices lifted as the Opec+ producer group acted in early April to cut output.

However, Chinese refiners are still able to buy cheap Russian crude, as well as discounted cargoes from Iran and Venezuela, which help keep import volumes robust.

Iron ore was another area of import strength, with 96.18-million tonnes of the steel raw material arriving in May, up from April’s 90.44-million and 92.52-million from the same month in 2022.

Iron ore demand has held up largely because Chinese mills, which produce just more than half of the world’s steel, have increased output, with production rising 0.6% in May from the same month a year earlier.

But similar to crude oil, there are some potential bearish and bullish factors that make the outlook for coming months harder to discern.

On the bearish front are signs that manufacturing and construction are struggling to gain momentum, while infrastructure spending is also failing to spark a major boost in activity.

With the global economy slowing and China’s exports starting to come under pressure, it may be hard to justify being optimistic over steel demand.

However, sometimes bad news is good news for commodities in China, with market watchers expecting Beijing will try to boost the economy, most likely by opening the taps on steel-intensive infrastructure projects.

This may keep iron ore demand solid, though eventually there will have to be actual evidence of stronger steel consumption, not just the expectations that activity will rise.

Copper imports were also mixed, with arrivals of unwrought copper and products coming in at 444,010 tonnes in May, down 4.6% from the same month a year earlier, but up from April’s 407,293 tonnes.

However, imports for the first five months of the year are down 11% from the same period a year ago, suggesting that demand for the industrial metal is soft, a view supported by weakness in the official manufacturing Purchasing Managers’ Index, which recorded a second month of contraction in May.

Coal imports were also uneven, dropping to 39.52-million tonnes in May from April’s 40.68, but almost double the 20.55-million tonnes from May 2022.

Imports of coal have been robust in recent months as China turned to thermal generation amid lower hydropower output.

Falling seaborne prices also made imports more competitive against domestic supplies, but this dynamic has largely reversed in recent weeks.

High stockpiles at utilities may also dampen the appetite for coal imports, suggesting that arrivals may fall in June.

Reuters