China has seen very mixed fortunes from its commodities markets, which have been languishing under a long-running crisis in the property sector, according to The Global Treasurer. And while iron ore, the key raw material used to make steel, has been defying expectations of a slowdown, it’s not that simple.
In the first half of this year, Iron ore imports rose a robust 6.8% compared to the same period in 2023, reaching 611.18 million metric tons, up 35.05 million from the first half last year.
However, all that iron ore has not been going to make extra steel. Instead, it’s been used to rebuild inventories amid weak iron ore prices. Iron ore prices are down about 33% year-to-date and have fallen below $90 for the first time since 2022, again driven by the vicious cycle of weak Chinese fundamentals.
Meanwhile, China–the world’s biggest importer of crude oil–imported an average of 11.05 million barrels per day (bpd) in the first half of 2024, down 2.9% from 11.38 million bpd recorded in the previous year’s corresponding period. The decline in crude imports coincided with a period of rising oil prices, with Brent rising from $77 a barrel at the end of December to a high of $92 in April as OPEC+ deepened its voluntary production cuts.
Not surprisingly, China’s oil and steel industries are now in the red: the cumulative losses in the world’s biggest steel industry hit 34 billion yuan (S$4.76 billion) over the first nine months of the year, while China’s oil refining sector saw losses deepen to 32 billion yuan ($4.5 billion) over the period. Steel mills have been forced to slash output in a bid to protect margins while oil refiners are also cutting runs, with the rapid adoption of electric vehicles disrupting oil demand.
China’s imports of unwrought copper climbed 6.8% in the first half of 2024 to 2.763 million tons, again surprising to the upside. However, June's imports were 436,000 tons, down 15.2% from May's 514,000 and the weakest since February. Weakening copper imports coincided with benchmark London copper prices climbing to a record high of $11,104.50 a ton on May 20.
Chinese copper buyers ramped up imports during the period of lower prices, but started pulling back when prices soared.
A similar trend was observed in the coal market, with China's imports rising a strong 12.5% in the first half to 249.57 million tons thanks to seaborne thermal coal prices weakening.
Indonesian coal, a grade popular with Chinese utilities due to its higher energy density, ended at $52.70 a ton in July, nearly 10% lower in the year-to-date.
Beijing Boosts Stimulus Measures
It will be interesting to see how the Chinese economy and its commodity markets will respond to recent stimulus measures adopted by the People's Bank of China. A week ago, oil prices enjoyed a strong rally after Chinese banks adopted extra stimulus measures in a bid to spur economic growth. Back in September, the PBOC cut banks' reserve requirement ratio by 50 basis points and the benchmark seven-day reverse repo rate by 20 basis points, the most aggressive stimulus since the pandemic. Chinese banks built on that last week by cutting their benchmark lending rates by a more than expected 25 bp, a move expected to stimulate economic growth and boost energy demand by the world’s largest oil importer. The one-year loan prime rate (LPR) was lowered to 3.10% from 3.35%, surpassing expectations of a 20-bp cut while the five-year LPR was lowered to 3.60% from 3.85%, also higher than expectations of a 20-bp cut.
Weak oil demand by China has been playing a major role in the ongoing bearish sentiment in oil markets. Bloomberg estimates that total Chinese oil demand this year (Jan-Sep) is down -3.8% y/y to 13.99 million bpd.
Last week, the oil price rally reversed again thanks to a bearish economic report coming from China. China’s inflation data for September showed that consumer prices increased by a modest 0.4%, falling short of economist expectations of 0.6%. This marked the slowest price increase in three months, Reuters noted in its report. Whereas lower consumer prices are normally considered bullish for oil prices, the experts are interpreting China’s slowing inflation as a reflection of weaker demand that will continue to weaken as inflation slows.
“China faces persistent deflationary pressure due to weak domestic demand. The change of fiscal policy stance as indicated by the press conference yesterday (Saturday) would help to deal with such problems,” the chief economist of Hong Kong-based Pinpoint Asset Management told Reuters.
By Alex Kimani for Oilprice.com