China’s massive stockpiles of commodities show the depth of its economic problems

VaselineSeptember 2, 2024

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China’s massive stockpiles of commodities show the depth of its economic problems

(Bloomberg) — Inventories of key commodities are building in China, evidence that economic activity remains too weak to shed a glut that is crushing prices from steel to soybeans.

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The government’s growth target for the year looks increasingly elusive, an unwelcome development for the drillers, miners and farmers who supply the world’s biggest importer of commodities. The surge in stocks could suggest some traders were surprised by the economy’s poor performance since the end of the pandemic. Others may have underestimated the extent of China’s pivot from the old economy to the new.

But the stockpile is also a testament to Beijing’s premium on making sure its factories and citizens never come up short. Even when its economy is hot, China is home to huge amounts of raw materials. It holds more than 90 percent of the world’s visible copper reserves, nearly a quarter of the world’s crude oil and more than half of staple crops such as corn and wheat, according to research from JPMorgan Chase & Co.

So while consumption and industrial activity are certainly weak, China’s state-owned importers may not be too fussed if they got their purchases wrong, given their mission to ensure the country’s reserves are sufficient whatever .

Pile of coal

Fears of energy shortages in 2021 and 2022 have drawn renewed attention to China’s energy security, particularly the availability of its main fuel – coal. Beijing’s response has been to raise production and imports to record levels.

But these efforts have coincided with subdued industrial demand and a dramatic increase in clean energy generation, which now meets almost all of the country’s growth in consumption. The result is that coal stocks rose to an unprecedented 635 million tonnes at the end of June, from less than 90 million at the end of 2021, according to an estimate from data provider China Coal Resource.

Gross balance

China’s oil market faces similar problems, with a weak economy, rising domestic production and a long-term decline in demand as decarbonisation accelerates. Refiners have been forced to trim their canvas accordingly by cutting operating rates. Imports fell.

Although onshore crude inventories rose to a more than 10-month high of more than 1 billion barrels in July, they are still below last summer’s peak, according to Vortexa Ltd. This could signal even fewer imports if firms take a cautious approach by attracting. on ample supplies to meet any seasonal increase in demand in the fall.

“Given the uncertain demand outlook, refiners may choose to draw down commercial tanks rather than increase purchases if they need to increase numbers as demand picks up seasonally,” said Jianan Sun, an analyst at Energy Aspects Ltd.

Slump from soy flour

China’s feed mills have had their fill of cheap Brazilian soybeans this year, only to find that downstream appetite for animal feed is not as strong as expected. China’s pig herd, which accounts for the lion’s share, has shrunk as the economic slowdown has reduced meat consumption.

That lifted soybean meal stocks to their highest level since 2016 and pushed local prices of the feed ingredient to a four-year low. That’s bad news for American farmers preparing for the US export season. And it also prompted a rare reversal in trade flows, replicated in other markets such as copper, that saw China export large quantities of a commodity it usually imports to absorb its surplus.

Iron ore flasks

China’s steel industry is in crisis as the country’s moribund real estate sector drags down construction demand. Port inventories of the key raw material, iron ore, rose to the highest level for the period of the year.

Margins in the manufacture of hot-rolled coil, used for auto bodies and appliances, are near record lows, although there are tentative signs that the market is recovering from its summer slump. But for mills to weather the recession, they will likely have to continue to cut production, and that will mean even less demand for the steelmaking ingredient.

Copper’s credentials

It’s not all doom and gloom in China’s metals industry. Copper buyers were drawn back into the market by a rapid decline in international prices from their all-time high in May. That shows in warehouse stocks tracked by the Shanghai Futures Exchange, which have eased from a four-year high in June, though still at a record high for this time of year.

Like steel, copper consumption is heavily dependent on the construction industry. But the highly conductive metal has other uses outside the old economy that suggest demand will increase as China adds more power lines, batteries and renewables to support the energy transition.

On the Wire

China has relied on its manufacturing strength and export engines to offset the strength of the shrinking housing market and keep its growth target in sight. Growing headwinds on both fronts suggest the government will need to step up its support if it is to meet its target of around 5% expansion.

China’s solar power producers have just come off a bloodbath of an earnings season, but there are tentative signs that the massive glut plaguing the industry may be starting to ease.

Chinese and Philippine coast guard vessels collided in a disputed area of the South China Sea on Saturday, the latest such incident amid rising tensions between the two nations. The two sides blamed each other for the event.

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