China's Commodity Trends Tell a Story
Full background for my commentary made to MarketWatch
In an interview this past week with veteran MarketWatch journalist Myra P. Saefong, I discussed China’s commodity trends and its relation to what this implies for the Chinese economy and global commodity prices going forward. My commentary can be found in Myra’s article here on MarketWatch as well as in MarketWatch’s “Stock Market Today” live feed. Here’s the full background for my opinions.
While the Chinese government has (understandably) been assuaging the global marketplace on its continued attractiveness as both market and manufacturer, China’s industrial base seems to think otherwise, as estimable via trends for key commodities.
A Tale of Downtrends
Copper and aluminium are both fundamental inputs for manufacturing. Prior to 2020, China’s aluminium and copper imports had generally increased with a couple of months of slight cyclical downturn in every year. In 2020, aluminium imports shot up precipitously in the first few months as prices slumped. Since 2020, aluminium cyclicality shifted: imports drop in February and March and pick up afterwards. This hasn’t been the case in 2024: since March, aluminium imports have fallen 36% as of June; in 2023 for the same period, it had risen 5%.
For copper, a “head and shoulders” pattern has existed across Q1 for the past four years, following which imports rise in Q2. While this trend largely persists, net imports are in a downtrend to 2019 levels and beyond.
On the other hand, aluminium and copper exports (essentially re-exports) have massively picked up in strength: aluminium exports have risen 49% since February while copper exports have risen 257%. Since the commodities have shown a modest uptick of about 4% and 2.5% respectively, it could be construed that it was considered more profitable to export inventory rather than hold for utilization.
Essentials Holding Steady
Oil imports have stayed well within the ranges shown in 2023 and expected to continue doing so. Infrastructure building programs will likely continue to prop up iron ore imports while coal imports are rising to power China’s vast network of power plants.
Wheat imports have seen significant weakness with soybean imports rising instead. Copper and aluminium imports can be expected to show weakness and rising re-exports in the immediate near future.
A drop in aluminium, copper and wheat would affect Australia, Canada and Chile the most - given their leadership position in exports of these commodities.
China’s Economy: 2015-2016 versus 2024
A weakness in manufacturing and productivity does find parallels in the leadup to the 2015-16 Chinese market crash. With the Western Hemisphere in general paring down consumption volumes and the Chinese economy’s “export” engine facing competition in the long run from the likes of India and Vietnam, provincial governments facing increasing difficulties in raising tax revenue to prop up the “infrastructure building” engine, and resilient domestic consumer reluctance on spending weighing down its “domestic consumption” engine, the Chinese economy’s vulnerability is simultaneously local, global and strategic.
With market trading restrictions that progressed from a ban on net sales of stocks at open and close in February to wide-ranging bans on short-selling in July, only one condition lies outside of the fact patterns seen in 2015-2016: it's unlikely that the People’s Bank of China will devalue the renminbi this time around. In 2015, the rationale employed was that blue-collar wage increases made exports less competitive. In the current day, workers' wages are holding steady, with work hours even being slashed in many cases (as seen recently, for example, in Tesla's Giga Shanghai). Given the depressed consumer buying volumes and imports of essentials such as soybeans, coal and oil holding steady, this move would be highly counter-productive for China's economy.
The “domestic consumption” engine of the Chinese economy, in particular, has indications of a pullback: real estate interest has been plummeting, online sales falling or needing discounting strategies to prop up volumes - with a downtrend in cotton and cosmetics imports — even after accounting for cyclicality — indicating possible barriers to furthering sales among more affluent population segments.
While the People’s Bank of China’s rate cut might have been intended to induce spending, the average Chinese consumer seems more inclined to tamp down and save. As a market signal, it certainly hasn’t been a boost: since this year’s high on the 20th of May this year, the normally-conservative CSI 300 has dropped 7.6% till close as of the 26th, the more sensitive Hang Seng Index has dropped 13.3%.
Commodities Outlook vs the Chinese Economy
When markets turn sour, gold often rises as a result of “safe haven” flight towards “safe havens”. When it comes to the Chinese economy, gold found very limited haven support during the 2015-16 Chinese stock market crash and is generally disconnected in cause-and-effect terms from China’s economic trajectories.
There are multiple avenues for commodities outside of gold to find support. India’s domestic consumption continues to rise as does those of many parts of Southeast Asia as well as Latin America. Since demand from these regions are projected to be persistent, Chinese enterprises' strategy of holding commodities and then re-exporting would likely be replicated by other parties in other regions. However, if the "hold and re-export" strategy is employed in large volumes, there is some scope for importing nations to seek intercession via international legal systems, bilateral government-level agreements or unilateral actions on said enterprises. Thus, this will likely be a short-lived strategy. If re-exports were to peter out, the copper and aluminium might find some easing in price uptrends — which will likely be a source of relief for the global manufacturing centers.
Precious metals are, by far, one of the stronger plays to make this year: gold, in particular, has been a substantial outperformer relative to Chinese equity markets in the Year Till Date (YTD):
Gold price uptrends will likely continue to find a significant amount of favour for reasons beyond just China.
The old investment trope of “China vs India” was explored in April to determined how investment switching based on market conditions is fundamentally flawed. Click here to read.
Speaking of India, the “Dharma” series — which traces the evolution of Eastern faith and philosophy — also features India in great detail. Here’s Part 1, Part 2, Part 3, Part 4 and Part 5, followed by the ancillary Part 6 and Part 7 discussing Malaysia’s and Indonesia’s spiritual history.
For a list of all articles ever published, click here.