China’s Commodity Stockpiles Prompt Market Concerns, Hands-on China Report, Jing Ulrich

[Skip to the end]

Looks like they are running their own passive commodity fund for a portion of their reserves!

China’s Commodity Stockpiles Prompt Market Concerns

By Jing Ulrich

Following record inflows of base metals, iron ore, crude oil and coal this year, investors are questioning whether the surge in imports of industrial commodities reflects a recovery in end-demand or excessive stockpiling. Imports of most base metals have softened month-on-month, reflecting an end to government stockpiling and rising domestic production – but remained high by historical standards in July. With current stockpiles at elevated levels for major industrial commodities, there is some near-term risk that a turn in market sentiment could trigger destocking by speculative traders and merchants, bringing continued price weakness.

– Iron ore inventories at major Chinese ports have surpassed last year’s peak at 76.5mn tons, equivalent to about 1 month of consumption. Steelmakers’ iron ore inventories are estimated at 30-40mn tons. Spot iron ore vessel bookings from Australia and Brazil to China have declined to a 9-month low, reflecting ample stocks and the recent slump in steel prices.

– China’s crude steel output reached an all-time record in early August. With major mills running near full capacity, overproduction is the primary reason for the recent price weakness. Steel inventories at the traders’ level have risen 21% since June, suggesting that inventory destocking could continue to weigh on steel prices.

– China’s coal imports totaled 62.2mn tons from Jan-Jul, compared to 40.8mn tons in FY08, while inventory at China’s main coal port is down 7.5% from a month earlier and 29% from July’s peak. Higher imported coal prices and the restructuring of smaller mines in recent months should result in lower imports going forward.

– Surging imports of iron ore and other bulk commodities increased demand for capesize ships earlier in the year, boosting the Baltic Dry Index. However, expectations of some moderation in China’s appetite for iron ore have contributed to a correction of 44% since early-June, to a level of ~2400 since late-August. Freight rates may remain under pressure due to overcapacity in dry bulk shipping.

– China’s crude oil imports jumped 42% YoY in July to reach a record 4.6 million bpd (19.6 mt) level. Although the government’s expansion of strategic petroleum reserves, may occasionally bolster monthly imports, higher oil imports primarily reflect the demand recovery.

– According to Chalco, aluminum inventories held by traders and warehouses amount to 500,000-600,000 tons, and industry oversupply is expected to last for 3 years.

The attached note provides an update of inventory, production and demand conditions for major industrial commodities.