London, 22 January 2011

Feeding the Dragon: China’s December trade data were mixed across different commodities, but together with extremely robust macroeconomic data right through to year end, it is difficult to interpret the trade numbers too bearishly, according to Barclays Capital.

"While short-term trends are volatile and could weaken in some markets, the full set of data for 2010 showed strong demand growth across all commodities. This comes alongside an acceleration in Q4 GDP to 9.8%, from 9.6% in Q3, bringing full-year growth to 10.3% from 9.2% in 2009. Furthermore, the stronger-than-expected money supply and new bank loans in December also reflect the difficulties in controlling the pace of liquidity growth and appear to set the stage for the key themes likely to emerge in 2011," says Kevin Norrish, Managing Director of Commodities Research at Barclays Capital.

"In 2011, we expect inflationary concerns and monetary tightening to dominate government economic priorities and market attention. Already, stronger economic data have been interpreted negatively by markets in anticipation of further tightening measures. Nevertheless, 2011 is also the first year of the 12th five-year plan, which also implies that investment growth will remain strong. New targets for grid investment and low-cost housing construction, construction of high-speed railways, extensions and expansions of subsidy programs for household appliances and continued efforts in boosting domestic incomes and consumption should ensure that commodities demand remains healthy this year."

"The bright spots in December’s trade data were in: oil, where China’s demand surged to yet another record high; coal, where total imports jumped to a fresh all-time high; platinum which saw imports rising to the second highest ever level; cotton, where imports were the highest since May 2006 despite record high prices; and coffee, where imports came in at record highs."

"The short-term trend appears to be a weaker base metals complex, with imports easing m/m across all of the metals except for nickel and zinc. For most of the metals, we believe that destocking at end-users has continued into December, but high prices could limit the scale and enthusiasm of any restocking when that happens. With domestic physical markets weak for the metals, imports are unlikely to pick up in any meaningful way before the Chinese New Year."

Chinese Agriculture Imports See Sharp Rise In 2010

China's grain imports made the largest gains by far among China's commodity purchases last year, signaling higher demand and flush liquidity that analysts say is likely to pave the way for more imports this year.

Led by a surge in corn shipments from the U.S., Chinese grain imports in 2010 surged as the rise of large-scale livestock farms and a shift in diet patterns dented Beijing's policy of self-sufficiency in the sector.

China imported 1.57 million metric tons of corn last year, an 18-fold increase on year, the General Administration of Customs said Friday, confirming semi-official statistics released earlier this week.

Private-sector and exporter estimates show China may import 1-2 million tons of corn this year, a sharp increase from when corn imports were just 49,000 to ns in 2008 and 83,000 tons in 2009.

Standard Chartered economist Stephen Green has also suggested that productivity growth in China's grain sector is likely to slow in coming years, making corn an "obvious candidate" for higher imports.

Higher demand in 2011 is coming from the rise of large-scale hog farming to feed China's growing appetite for meat, Deputy Agriculture Minister Wei Chaoan said last month.

Wheat imports were also higher last year, rising 36% to 1.2 million tons in 2010, the customs department said.

This year, four cargoes of around 200,000 tons of feed wheat have already been sold to Chinese buyers led by state grain trader Cofco Ltd., a person familiar with the situation said. Australia's major wheat exporter s are all involved in talks with Chinese buyers, the person said.

The rising grain imports were driven by still-loose credit conditions, fueling inflation to three-year highs towards the year-end.

"The deluge of liquidity that has flooded (the system) over the past year continues almost unabated," said Alistair Thornton, an analyst with IHS Global Insight. "Despite December's slight retreat in the consumer price index, the demand side of the inflationary picture remains unchanged."

Soybean imports last year reached a record 54.8 million tons, China Customs said.

Even for rice, arguably the most protected grain in China, imports in 2010 edged up to 366,171 tons, rising nearly 29,000 tons over the previous year. Local media reports suggest official figures don't account for ric e smuggling into the country across China's southern border.

Cotton imports also surged, nearly doubling on year to 2.8 million tons in 2010. Sugar imports were up 66% last year.

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