LAUNCESTON, Australia (Reuters) – The prevailing market narrative after China’s overall November trade data was that the world’s second-biggest economy is softening and starting to show the strains of the trade dispute with the United States.
After all, both imports and exports undershot forecasts for the month.
But while there is nothing inherently incorrect in such commentary, one factor that may not be getting as much attention as it should – the lower-than-anticipated growth in imports may be largely related to weaker commodity prices.
China’s exports rose 5.4 percent in November from a year earlier, well short of the 10 percent forecast in a Reuters poll. Imports grew a sluggish 3 percent, considerably weaker than the 14.5 percent forecast.
The export weakness was largely put down to the end of front-loading of shipments to the United States ahead of the now postponed higher tariffs of 25 percent on $200 billion of imports from China that had been mooted by President Donald Trump.
The import weakness was largely ascribed to slacker domestic demand. While this may be the situation for manufactured goods and services, it doesn’t appear to be the case for commodities.
The problem with simply looking at the trade numbers is that they are expressed in U.S. dollar terms, and not in volume terms.
Case in point – crude oil, where China is the world’s biggest importer.
China imported a record 10.43 million barrels per day (bpd), the first time inbound shipments had topped the 10 million bpd mark, and well above the 9.6 million bpd recorded in October.
Working out exactly how much China paid for its oil in November is challenging, but it’s likely to be less than it paid in October, despite the extra 15.1 million barrels imported.
Exhibit A: Brent crude hit a four-year high of $86.74 a barrel on Oct. 3 and has since slumped 27 percent to its close of $59.97 on Monday.
This means that at the time Chinese refiners were fixing cargoes for November delivery, prices were declining, encouraging volume growth.
Of course, there are other factors at work: The start-up of new refineries and their associated inventory buying, increased purchases by smaller, independent refiners aiming to use up their import quotas before they expire, and uncertainty over when exactly imports of Iranian oil cleared customs.
But the overall picture isn’t one of weakness for China’s crude oil imports, which are now up 8.4 percent for the first 11 months of the year, compared to the same period in 2017.
COPPER, IRON ORE, COAL
While copper imports were weaker in November compared to the same month a year earlier, they were also up strongly from October, with unwrought copper jumping 8.6 percent on-month and ores and concentrates up 8.9 percent.
Three-month London copper prices peaked in early June and have subsequently dropped about 17 percent. That means Chinese buyers would have been paying substantially less for their imports in November than in prior months.
Iron ore and coal present more interesting reading. Imports of both fell in November from October, despite weaker prices. Iron ore imports slipped 2.4 percent to 86.25 million tonnes, while coal purchases from overseas dropped 17 percent to 19.15 million tonnes.
But the weakness in these imports is almost entirely policy driven. In other words, it’s the deliberate choice of Beijing to import less, rather than a sign of domestic economic weakness.
The authorities have made it clear they didn’t want coal imports in 2018 to exceed those of 2017 in order to protect the local mining industry.
While they will fail in this endeavor, as the first 11 months of 2018 has seen imports reach the total for 2017, it does mean that November and December coal imports will be well below potential.
Iron ore is struggling along with steel as winter production curbs aimed at lowering air pollution start to have an impact on the market.
Overall, the volume of China’s commodity imports, the main component of its overall import bill, offers more insight into the real state of the economy than looking at just the value.
There are solid reasons to be cautious about the outlook for the Chinese economy and the impact from the trade dispute with the United States, and there are also questionmarks over whether the relatively robust commodity imports will sustain.
But there is also a risk in turning too bearish too quickly by not accounting for the impact of weaker commodity prices on the value of imports by the world’s biggest buyer of commodities.
Editing by Kenneth Maxwell