Barclays has a little note out on China with which I completely agree.
One of the bright spots for commodity markets recently has been a consistent pick-up in China’s import demand from the low point in Q2, when imports of almost all major commodities fell into negative territory. August was another strong month, showing a continued broad-based recovery that commenced in June and accelerated in July, with iron ore, copper, crude oil and soybeans imports all in positive y/y territory for three consecutive months.
However, this growth is not the outcome of a successful transition towards the more consumption-led growth pattern that the government is targeting. Rather, it has been fuelled by a lurch back towards the familiar twin growth engines of construction and investment, as domestic private demand has failed to take-off as a significant growth driver. As such, the recovery is likely to prove short-lived and our China economists recently revised down their 2014 growth forecasts to just 7.1% from 7.4%.
Nevertheless, commodity import growth is likely to ease back before then. Partly because Q4 12 was a relatively strong quarter for commodity imports (with the notable exception of copper), so comparisons will become more difficult over the next few months. Additionally, imports have received what we expect to prove a temporary boost from inventory cycles recently and that may not persist.
In oil, improving merchandise exports and modest investment growth should support demand in the coming months. However, product inventories remain elevated (still higher y/y by 8%), suggesting demand from refineries will be sluggish over the coming months, especially as they embark on seasonal maintenance.
In base metals copper imports have already contracted m/m due to a less attractive price ratio that has curbed import appetite for financing and reduced inflows. In addition, the latest data show a steep slowing in the pace of spending in the power grid, a key driver for industrial metals demand, especially copper.
In precious metals silver imports continue to contract, but there are signs of strength in PGMs. Platinum’s low prices are providing support to jewellery demand and palladium import levels are holding up well too. Looking ahead, the delayed implementation of China IV standards and continued strength in domestic auto sales and production should keep palladium imports stable.
Barclays does not cover iron ore but you can extend this argument holus bolus.
