Commodity price weakness all about supply

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From Mac Bank today:

China Customs released preliminary trade statistics for April on Thursday. While much of the focus may have been on the impact (or lack of it) of tighter financing constraints, in our view the picture is a lot more simple – too much supply across key commodity markets. Chinese raw material imports maintained their strength as strong exports pushed into their market of last resort. Meanwhile, exports of both steel (at levels not seen since 2008) and aluminium products were extremely robust, despite supply cuts in both, as excess refined material bled out into international markets.

  • Iron ore imports exceeded 1 billion tonnes annualised for only the second time, resulting in a 24% YoY rise over April 2013 levels. With the usual Q1 supply disruptions absent, seaborne exports have continued to surpass expectations, as discussed in our recent note. Even with Europe, Japan and Korea restocking, China has borne the burden in soaking up this excess supply..
  • Copper concentrate imports also rose, by 22% YoY and 10% MoM to reach 12.2mtpa. We understand spot buying has been thin given the unfavourable SHFE/LME import arbitrage and high stock levels at the domestic smelters, so it seems that these high volumes are predominantly being imported on long-term contract, reflecting the readily available supply in the market.
  • Perhaps the most notable data from the preliminary release related to steel exports, which totalled 92mtpa, up 36% YoY to a level only ever surpassed in Q3 2008. Net steel exports also reached 75mtpa, which despite being less than 10% of Chinese overall output equates to all the steel we expect to be produced in India in the current year.
  • A similar situation exists in aluminium, where Chinese stocks have been rising strongly year to date. While not quite as strong as in March, unwrought aluminium (including semis) exports remained above 4mtpa – this is despite the fact that some primary smelter capacity was curtailed in the month.
  • Total coal imports were up 11% MoM in April on a days adjusted basis, at 27.1mt (330mt annualised), but were still down 5% YoY. On a year-to-date basis, imports are up just 2% YoY. The breakdown of imports by coal type is not available until the full trade data release, but we would expect that the April number is a reflection of (continuing) soft met coal import demand.

I agree. The problem is, weakening demand will be the story in the second half as the China property shakeout gathers pace.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.