London, 21 December 2011

China’s November trade data continue to paint a picture of robust commodity demand, at odds with the recent dip in business confidence and evidence that economic growth is slowing, according to Barclays Capital. Different commodities saw import demand troughing at different times earlier this year, but from the lows hit in H1 the general picture has been one of steady expansion. "This trend carried through into November with imports of copper, coal, crude oil and soybeans all hitting their highest levels for the year-to-date, and iron ore imports second only to January’s level."

However, fears over the health of China’s economy continue to grow. So, is this strength just a final blow-off before a steep descent in its commodity import demand in 2012?

"We think not," say BarCap. "First, because despite the recent import strength, local inventories of commodities are low. There has been aggressive de-stocking of copper and aluminium all along the consumption chain through most of 2011, which has only recently come to an end. In oil refined product, stocks rose a little in November from very low levels in October, but crude oil inventories continued to fall. In agriculture the government is in the process of rebuilding stocks of grains, cotton and soybeans by buying from local producers. The low level of commodity inventories means that the likelihood of a slowdown in underlying demand being exacerbated by a de-stocking cycle of the kind seen in 2008/09 is slim. Indeed, were sentiment to improve, then restocking could add some additional strength to import demand early in 2012.

"Second, imports of raw materials for the manufacture of industrial metals have also been exceptionally strong. Concentrate imports for copper hit their third highest level ever in November and were very strong for other metals too. This is important because it suggests that local producers intend to keep their own production levels high, something they would not be doing if demand for their output was weakening.

"Third, some of the sectors most sensitive to any slowdown in the economy are still performing well. Petrochemical demand bounced back strongly in November following a dip into negative territory in October. Jet fuel demand, too, bounced back after softness in October, up 8% y/y to hit an all-time high. Not what one would expect to see in an economy on the brink of a sharp decline in its raw material needs."

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Barclays Capital Commodities Research

www.barcap.com