Commodity traders are counting on China for a further recovery in natural resource markets. The country accounts for 30 per cent of the world’s key commodity imports, is two months ahead of the west in easing lockdowns and has used weak prices to stockpile through the crisis.
However, Beijing’s relations with the world are strained as never before. Diplomatic disputes, notably with the US and Australia, highlight a delicate balance, whereby small shifts in international relations could either accelerate global recovery or derail it entirely.
China dominates the iron ore, copper and soyabean markets, absorbing 60 per cent of traded supplies. It buys 30 per cent of globally traded fertiliser, 20 per cent of crude oil and coal, and 17 per cent of the world’s liquefied natural gas (LNG).
The country’s commodity imports remained robust through the pandemic, with importers building stocks as prices tumbled. Year-to-date crude oil imports have averaged 10m barrels a day, only 500,000 b/d below late-2019 levels, aided by a refined products price floor that sustained refinery demand. Price declines would have been worse without Chinese buying.
Chinese industry, rebounding from January-February lockdowns, is now a yardstick for reawakening western economies. But after the first quarter’s 6.8 per cent decline in gross domestic product, the government shelved its annual growth target, suggesting 2020 growth near 1 per cent at best. Still, modest Chinese growth would exceed the declines expected elsewhere for 2020.
Small business closures and surging unemployment (70m by some estimates) will weigh on Chinese consumer spending and, with manufacturing and services activity constrained, China’s fiscal stimulus is key to re-energising the economy.
However, discarding a 2020 GDP target suggests China will not simply borrow its way back to growth and full employment. Fiscal stimulus, while significant, is below 10 per cent of GDP, above other emerging markets, but less than the 20 per cent pumped into OECD economies.
Looking ahead, although government spending will support commodity imports, geopolitical issues will complicate relations, particularly with Australia and the US. Washington and Canberra have criticised Beijing over its initial handling of the Covid-19 crisis. Tensions also surround anti-dissident laws for Hong Kong, South China Sea territorial issues and ongoing US-China trade tariffs.
Iron ore has led recent commodity recovery, buoyed by Chinese restocking and export concerns surrounding Brazil and Australia. Strong Chinese steel demand and low iron ore stocks saw prices gain 25 per cent since early April. After falling sharply in February and March, iron ore imports jumped 19 per cent in April from a year ago. Construction recovery, resurgent vehicle sales and ongoing stimulus will boost future Chinese imports.
Two-thirds of China’s iron ore comes from Australia, so worsening Beijing-Canberra relations risk undermining Australia’s dominant supplier role. However, with China’s other key supplier Brazil struggling to sustain exports, Beijing may avoid levying tariffs on Australian ore for now.
If China seeks to penalise Australian exports, coal could bear the brunt. January-May Australian deliveries into China were up 50 per cent annually, partly reflecting late-2019 customs delays. However, total Chinese coal imports eased in May, as Beijing prioritises domestic production. Beijing’s aim to protect local mining jobs and the precedent of 2019 quotas on Australian exports suggest coal is a more likely target for Chinese trade retaliation.
If anything, US-China relations are worse still. Beijing rejects diplomatic criticism from the Trump administration, suggesting Washington should focus on its own economic, healthcare and human rights issues before lecturing others.
January’s preliminary US-China trade deal set Beijing a target of purchasing $69bn of US crude, LNG and energy commodities in 2020-21. Improbable in January, the subsequent collapse of US hydrocarbon production and global energy prices now renders that target illusory. At current prices, China would need to raise imports to 2m b/d of crude and 150m tonnes of LNG.
US crude oil exports to Asia are rising and deliveries to China have resumed, but they seem unlikely to exceed pre-crisis levels of 350,000 b/d until US production recovers and political tensions ease.
US LNG exports to China may also struggle. Despite trade tensions with Canberra, Australian LNG is shielded from tariffs or quotas, given China’s 50 per cent reliance on Australian supply, Chinese stakes in Australian LNG projects and the realities of freight economics.
Indeed, economics, not geopolitics, will ultimately determine China’s import portfolio. Troubled diplomacy won’t diminish China’s commodity imports as its economy recovers. Left unresolved however, such tensions could reshape supply and pricing relationships, determining which commodity exporters benefit most from China’s demand recovery.
David Fyfe is chief economist for Argus Media and a former head of oil markets at the International Energy Agency
The Commodities Note is an online commentary on the industry from the Financial Times