A report in the Financial Times last week covered falls in metal prices due to recent Chinese trading data.
The data showed a 10% fall in China’s exports last month and a greater than expected drop in imports sent copper down nearly 3% late last week before a slight recovery on Friday. The FT quotes Caroline Bein analyst at Capital Economics saying “ to drop in exports is negative for industrial commodities raising concerns about weakness in the manufacturing sector and import figures raise concerns about domestic demand.”
Copper was not alone in reacting to the poor trade figures, although the Shanghai market seemed remarkably sanguine, European and U.S. stock markets dropped sharply, driving stocks lower and boosting gold, bonds and safe haven currencies like the Yen.
Are the trade figures quite as bad as they seem? And do they justify the markets sharp reaction? There are broadly two issues at work here. First, the wider issue of China’s trade data. Back to the FT, China’s trade data showed that the country’s exports last month were down 10% from a year earlier — following a 2.8% contraction in August — suggesting that global demand was decidedly weak.
Worse, imports were down 1.9% suggesting the drive to move China’s economy from export-led manufacturing to domestic-led consumption was failing and the domestic market was failing to pick up the slack. But another FT article pointed out that the data was expressed in dollar terms and did not take account of movements in exchange rates.
“In local currency terms, last month’s exports fell by a substantially smaller amount — 5.6% — from a year ago, while imports were actually up by 2.2%.”
In addition, September has consistently been a weak month for data, so a drop from August was to be expected. China’s results, while underwhelming, are not justification for a sudden sell-off or flight to safety. Rather they should be seen as part of a wider sluggish global economy of which we have all been aware for months.
What’s the Copper Being Used For?
The more focused issue, that combined with the trade numbers prompted the drop in copper, were reports that refined copper imports into China last month fell 2.9% from a month earlier and were down 25% from a year earlier. Indeed the FT said this is the lowest absolute level since February 2015. But, as we reported last month, refined copper imports have been trending down for some time as China’s vast smelter industry has sucked in plentiful supplies of copper concentrates, driving a 10% increase in refining this year.
As always with copper, you cannot be sure whether imports or domestic production are actually being consumed or whether the metal is being used or stored for financing purposes. Import and production numbers should, therefore, be taken with a pinch of salt. Nevertheless, industrial demand appears to remain robust in China as is demand for iron ore and coking coal for the steel industry. To what extent this will continue during the quieter construction months ahead remains to be seen, but the housing market has played its part this year in supporting demand for a range of ferrous and non-ferrous materials.
While China’s trade data is far from impressive, it should be seen against the backdrop of weak global growth and rising protectionism. Nor is it likely that the recent sell-off in copper prices is a harbinger of more to come. Rather, it is more a result of investors’ knee-jerk reaction at one month’s poor data.