China's appetite for commodities remains strong

The Chinese trade data for December revealed that China’s exports and imports alike soared in December, beating market expectations by a large margin. The sharp increases seen in annual growth rates were partly, but not only, caused by base effects due to sharply lower exports and imports in December 2008. The preliminary data on Chinese imports of different commodities last month similarly showed a sharp rebound in copper buying whereas aluminium actually fell slightly (see charts); on the year, China’s aluminium imports are up by 70% however. Imports of crude oil rose by almost 25% and soy beans surged from 300,000 to 500,000 tonnes in December. Notably, China’s imports of iron ore and concentrate rose further last month, posting an annual growth rate of 80%. Rising Chinese demand for this commodity is partly a result of stimulus spending boosting car sales and thus steel demand. This in turn strengthens the case for the some of the world’s largest suppliers, such as BHP Billiton, Rio Tinto and Vale, to ask for higher prices, and Macquarie reckons that a 30% rise in contract prices could be seen this year. Separately, data from the China Association of Automobile Manufacturers in fact showed that Chinese sales of passenger cars, bus and trucks now exceed that of the US in numbers. We have recently published our Commodities 2010, in which we discuss five themes that we believe will dominate commodity markets this year. Asian appetite for commodities is one of these, and the December trade figures highlight that demand from China remained generally strong leading up to the new year. Whereas the trade report is certainly bullish for copper, the aluminium import figures remain low compared with the highs seen in mid-2009. Indeed, Chinese production of the metal has soared in recent months (see chart) and it is likely that China could become a net exporter of aluminium during the course of 2010. This underlines that fundamentals for aluminium remain relatively weak, and, in our view, the recent price surge starts to look overdone. The overriding importance of the business cycle so far in the recovery looks set to diminish this year, and the diverging picture across the metals sector highlights the growing importance of individual-specific fundamentals for different commodities.