Great China’s Belt and Road initiative may be smoke and sentiment
London — One of the great hopes for a sustained bull run for commodities is China’s Belt and Road initiative, with expectations of hundreds of billions of dollars in commodity-intensive projects over the coming years.
However, quantifying the impact on various commodities of China’s ambitious plans to fund, build and benefit from infrastructure and other ventures along maritime and land corridors linking Asia to Africa and Europe is challenging.
In theory, the touted billions to be spent on ports, roads, railways, power plants and so on will serve as an ongoing stimulus for commodities such as iron ore, coal, copper, crude oil and a host of minor metals with industrial applications.
However, so far, the "One Belt, One Road" concept promoted by Chinese President Xi Jinping, seems to have had virtually no impact on commodity demand in the world’s largest producer, consumer and importer of natural resources. If there were a flood of projects being financed and built by Chinese companies, it would be reasonable for this to show up in various economic indicators.
Starting with the money, and while there is some evidence of Belt and Road Initiative (BRI) investment, they are far from compelling numbers. China’s outbound, non-financial investment (ODI) fell 41.8% in the January to August period to $68.72bn, the commerce ministry said on September 14.
While much of the fall can be attributed to a clamp-down on speculative capital outflows, there is also evidence from the earlier figures for January to July that BRI investment is a small component of total ODI.
ODI in 50 countries involved in the BRI totaled $7.65bn in the January to July period, accounting for 13.4% of the total, according to the commerce ministry.
It also seems that much of the BRI-related spending is on buying stakes in existing companies and ventures, rather than on actual construction and infrastructure projects. Given the lack of BRI investment, it’s hardly any surprise that China’s exports of commodities that would be expected to benefit has been muted.
The main, relevant, finished commodity is steel, but exports of steel products are down 29.8% to 59.6-million tonnes in the first nine months of the year, compared to the same period in 2016.
Again, some of this decline will be because of the imposition of trade measures against Chinese steel exports by the EU, the US and India, among others. But a look at where Chinese steel exports are heading also suggests that not much is being channeled into countries that should be at the forefront of BRI spending.
The US commerce department’s International Trade Administration said in a report published in August that the biggest buyer of Chinese steel was South Korea, which is not a BRI country.
In countries along the BRI trail, China’s steel exports performed poorly, with the report showing shipments in the first half of 2017 to Pakistan were down 35% and by 32% to Vietnam, just two examples of a broader trend of weaker Chinese shipments.
Exports of cement slumped 33% in the first nine months of 2017 compared to the year earlier period, according to customs data released on October 24.
The overall picture is that China’s BRI is still largely a conceptual exercise, rather than a physical reality
The overall picture is that China’s BRI is still largely a conceptual exercise, rather than a physical reality.
The positive impact on metals was a common theme at several events at this week’s London Metal Exchange Week, but it was also apparent that the bullishness is only sentiment. When markets are rising, traders, analysts and other participants are tempted to find narratives that support the price action, and this appears to be the case with the BRI.
While it’s entirely possible that the BRI plans do ultimately result in significant spending on infrastructure and other projects across a swathe of developing nations by Chinese interests, right now there is little evidence this is the case.
There are other solid reasons why industrial commodities are performing strongly, but trying to fit the BRI into the narrative is stretching a very long bow.
• The opinions expressed here are those of the author, a columnist for Reuters