There has been much debate about the strength of Chinese growth figures amid fears that any slow down in growth would have a detrimental impact on the global economy in general and the metals markets in particular. Surely a sudden drop in metals prices would be a good thing you say? Well yes, for a metals consumer it would be welcome but for anyone in the supply chain such as a distributor to be left with stock in a falling market results in losses and causes buying patterns to seize up as buyers hold off in the expectation prices will fall further.
So within reason it is good news that based on recent data it would appear the Chinese economy is still growing strongly in spite of the government’s recent increase in bank reserve requirements and credit tightening. Two of the key growth metrics are oil and copper consumption. Both commodities are widely used as benchmarks of industrial activity and easily tracked making the data arguably more reliable than government estimates of GDP growth.
As this graph from Reuters shows, oil imports have surged in 2009 following a brief dip in late 2008/early 2009 when the whole world seemed to seize up.
The headline increase of 19.4% over a year earlier is being driven by Beijing’s incentives to boost purchases of smaller cars, particularly in rural areas. Passenger car sales rose 55% in February from a year earlier, building on January’s rise of 116% year over year. Oil consumption meanwhile grew 9.4% in February over January. We will come back to these figures later.
Meanwhile, we mentioned copper consumption as another key metric. Anyone following the copper market will know that there are two opposing forces in action at the moment. On the one hand, stocks are rising on global exchanges and (by the International Copper Study Group’s figures, posted in a different Reuters article) the global market is in surplus in 2009 and hence in oversupply. World refined copper production exceeded consumption by 365,000 tons in 2009, up by 63% from 2008, the ICSG said in its latest monthly bulletin. The market was in a deficit of about 140,000 tons in the first half of 2009, which resulted from high Chinese apparent usage and reduced world refined production, but was more than offset by a surplus of around 500,000 tons in the second half of the year as a result primarily of the recovery of refined production and a coincident decline in Chinese apparent demand.
Again we will come back to this point of real and apparent consumption. The same point applies to oil imports. The massive surge in copper imports in the first half of 2009 was as much for stock as it was for real consumption. Hundreds of thousands of tons went into SRB, trade and speculative stocks distorting the import data and making the economy look like it was consuming even more metal than it really was. In reality, China’s copper consumption, although it has been growing, has been much steadier than import figures alone suggest. The same has happened to oil and stocks are now at comparatively high levels such that the country was a net exporter of certain refined petroleum products in December and January. In the case of copper there is another switch taking place. For the first two months of 2009, total net imports of refined and scrap copper were 853,000 tons according to a Standard Bank daily report, of which 53% was refined copper and 47% was scrap. For the first two months of this year, year over year refined imports are down 8.5%, however, scrap imports are up by 52.5%. The first two months of 2010 has therefore seen total combined net imports of scrap and refined copper increase some 20% year over year to 1,026,000 tons. However, so far this year, scrap now accounts for nearly 60% of the total import figures, and virtually all of the net increase in copper imports. Higher copper prices have encouraged more scrap arisings and increased the availability of copper scrap. Greater availability has also increased the market premium for refined metal and so encouraged a more active scrap market to re-establish itself.
Clearly China has been the stimulus for global demand and prices on both commodities over the last 12 months. In terms of maintaining stability, it is therefore good to see the country is continuing to grow robustly. The government is committed to maintaining a growth rate in excess of the 8% level believed to be necessary to ensure social stability and high levels of employment. The problem could be if inflation picks up during the year. A revision of the Renminbi would reduce inflation pressures on imports but not wage rates or property values. For the time being, the government appears to be on track for manageable robust growth in 2010 but it would only take 1-2 months of zero consumption growth to push both oil and copper down sharply.