China Imports: Robust Growth To Give Way In H214

We expect robust industrial commodity import growth to ebb over the coming months as the Chinese government continues to tighten the screws on the commodities financing trade. China's import growth of industrial commodities rebounded in April, with copper and iron ore shipments defying broad weakness in the domestic economy.

  • Crude oil import growth will be sustained by increasing demand from an expanding downstream segment. Refined oil imports will continue to contract as local oil demand is met by domestic production.

  • China continues to import increasing volumes of agricultural products. Rising imports is a structural trend that will accelerate over the coming years, especially in the cases of corn, wheat, sugar and dairy.

  • Not Out Of The Woods Yet
    China - Overall HSBC Flash & Official PMI
    • We expect robust industrial commodity import growth to ebb over the coming months as the Chinese government continues to tighten the screws on the commodities financing trade. China's import growth of industrial commodities rebounded in April, with copper and iron ore shipments defying broad weakness in the domestic economy.

    • Crude oil import growth will be sustained by increasing demand from an expanding downstream segment. Refined oil imports will continue to contract as local oil demand is met by domestic production.

    • China continues to import increasing volumes of agricultural products. Rising imports is a structural trend that will accelerate over the coming years, especially in the cases of corn, wheat, sugar and dairy.

    We maintain our below-consensus forecast for China's real GDP growth of 7.1% in 2014 and 6.0% in 2015. Even as falling property prices and slower economic growth take hold, we believe the Chinese government will be unwilling and unable to unleash the scale of stimulus measures necessary to accelerate the economy ( see 'Cooling Property Market To Exacerbate Economic Downturn', May 27). Despite the recent rises in HSBC and official Purchasing Managers' Indices (PMI), we see little impetus for a marked pick-up in growth over the coming quarters.

    Not Out Of The Woods Yet
    China - Overall HSBC Flash & Official PMI

    Industrial Commodities: Struggles Ahead

    We expect the impressive bounce in Chinese import growth for industrial commodities since January 2014 to lose steam over the coming months. The rebalancing of the Chinese economy away from fixed asset investment will significantly drag on consumption growth for industrial metals. Furthermore, Beijing's intensifying crackdown on the commodities financing trade should eventually lay bare a weaker trade picture in H214 ( see 'Chinese Commodity Financing Trade On Borrowed Time', March 25).

    Impressive Bounce Won't Last
    China - Select Commodities Imports (% chg y-o-y)

    Copper: Slowdown Inevitable

    We believe China's clampdown on the copper-financing trade, coupled with the weakness in the housing market, should tame growth in refined copper imports over the coming months. China's refined copper imports jumped 84.4% year-on-year (y-o-y) in April, the strongest growth clip since May 2012. Financing demand for copper has been a key reason behind the surge in import growth since H113. Additionally, China's State Reserves Bureau bought at least 200 thousand tonnes (kt) of imported copper from local bonded warehouses in April. This has helped support local premiums and boosted the appeal of seaborne purchases.

    Growth To Cool
    China - Copper Bonded Warehouse Stocks

    According to market estimates, an unwinding of the copper financing trade in China may unleash around 1.0mn tonnes (mnt) of copper onto the market over the coming quarters. Subsequently, this will be a drag on global copper prices at a time when a legacy of boom-time mining investment is coming online.

    Iron Ore: To Be Dragged By Distressed Steel Sector

    We expect Chinese import growth for iron ore to come under pressure in the coming months, having expanded by 24.2% y-o-y in April. Many Chinese steelmakers will struggle to sustain operations in light of declining profit margins, shrinking bank credit and the government's edict to slash overcapacity across heavy industry.

    Steeled For Weakness
    China - Steel Production and Iron Ore Imports (% chg y-o-y)

    In our view, steel exports are not a credible avenue through which Chinese steel mills can offset the slowdown in domestic demand and maintain strong production rates. The proliferation of trade disputes by the US, Europe and other trading partners should stem the growth in steel exports over the coming quarters.

    Thermal Coal: Supported By Electricity Demand

    Our core view is that China will remain reliant on seaborne coal for sufficient power generation over the next decade. Coal will be the only realistic option to providing baseload energy for the local population despite the green push in China. That said, China imported 20.8mn tonnes (mnt) of thermal coal in April, down 11.3% y-o-y. Low domestic prices and the depreciation of the Chinese yuan should continue to keep a lid on import growth in the coming months.

    Thermal Coal To Hold Up Well
    China - Coal Imports (% chg y-o-y)

    Crude Oil: Imports To Remain High On Seasonal Demand, Downstream Expansion

    We continue to stress that downstream expansion will fuel China's crude import needs, given domestic crude production limitations. Crude oil imports surged 20.8% year-on-year (y-o-y) in April to 27.9mn tonnes. This was in part due to a 1.0% y-o-y fall in crude oil production, while crude demand increased as refineries prepared for peak refining needs in Q214-Q314. We estimate that real crude oil demand in China came in at 44.7mn tonnes in April 2014 - or about 10.9mn barrels per day (b/d).

    Crude Necessity
    China - Real Crude Oil Demand (LHS, mn tonnes) & % Chg y-o-y (RHS)

    This is broadly in line with our view for refined oil production to rise 5% y-o-y to 10.4mn b/d on average in 2014. Crude oil imports should continue to increase y-o-y through to August 2014 to meet refinery demand over its peak season. This will see the diverging trend between crude and refined oil import growth continue.

    Diverging Pattern To Continue
    China - % Chg y-o-y In Crude Oil & Refined Oil Imports

    Refined Oil: Limited Import Gains Ahead

    Refined oil imports continued to fall in April 2014 and this will be a persistent trend in the coming years as the rise in China's domestic refining capacity reduces the country's refined oil import requirement. April 2014 saw a 34.7% y-o-y fall in refined oil products imports as imports came in at 2.54mn tonnes.

    Negative Growth To Rumble On For Refined Oil
    China - Refined Oil Imports (mn tonnes, LHS) & % y-o-y Change (RHS)

    As expected, the move into China's harvesting season in April helped to lift refined oil imports but only slightly, as growth in local refined oil production capacity is allowing domestic output to meet seasonal demand requirements. We expect the softening of refined oil imports to continue.

    Grains: Record Imports In 2013/14, Easing In 2014/15

    We expect China's grains imports to be stronger in the coming months, especially in the case of corn and soybean, after they remained close to historical averages in April 2014. Wheat imports, which were very strong at the beginning of the 2013/14 season (July-June), due to the disappointing crop, have eased since, but generally remain above historical levels. Wheat imports are likely to remain close to or below current levels (they came in at 375,360 tonnes in April, up 83.8% y-o-y) in Q314, and are likely to be exceptionally high for the entire 2013/14 season, at 7.0mn tonnes. In 2014/15, imports will ease significantly, due to an improvement in domestic supply, as we see production recovering by 0.4% y-o-y and reaching an all time high of 121.8mn tonnes.

    Imports Less Attractive
    Price Ratio - China/Relevant International Benchmark

    After recording very low levels of corn imports in March and April, we expect China to reaccelerate its inbound shipments in the coming months. Domestic corn prices have rallied recently on tight supply, which should increase the attractiveness of international corn. Moreover, corn importers are turning to alternative suppliers to US corn (Ukraine), as imports of US corn remains strongly limited by the ongoing dispute over the US's corn shipments containing a genetically modified variety the Chinese government has not approved. China will maintain a slight domestic corn production surplus in 2014/15, which will help maintain imports for the year at 2013/14's levels (5.0mn tonnes in 2013/14 and 2014/15).

    Deterring Imports
    China - Soybean Crush Margins (CNY/tonne)

    Soybean imports will remain above historical averages on a three-month horizon, as soybean prices in the country have rallied at a faster pace than CBOT quotes, which should prompt imports. However, imports will not reach the record highs recorded in December 2013, as domestic meat prices remain relatively low, while soybean crush margins are still in negative territory despite the slight improvement seen in recent weeks. Over the year, imports will rebound following 2012/13's low levels, and reach 69.0mn tonnes in 2013/14 and 72.0mn tonnes 2014/15.

    Broadly Decreasing
    China - Select Commodities Imports (mn tonnes)

    Softs: Milk Powder Imports To Ease

    Cotton will be the only commodity among softs to record declining imports in 2013/14 and 2014/15. For sugar, milk powder and vegetable oil, China will maintain elevated imports. In line with our long-held view, cotton imports have been slowing down significantly and came in at only 224,000 tonnes in March, down 47.8% y-o-y. The government is trying to offload its hefty stocks on the domestic market to deter millers from importing. We believe cotton imports will remain subdued in the coming quarters, reaching 12.8mn 480lb bales in 2013/14 and 8.5mn bales in 2014/15.

    Cotton Remaining Weak
    China - Cotton (LHC) & Milk Powder And Butter (RHC) Imports, '000 tonnes

    Milk powder imports will remain on their uptrend over 2014 and 2015, as domestic demand continues to grow. Despite various investment plans to boost domestic milk production, China will lack supply capacity and brand recognition in the coming years to compete with imported milk powder. However, after seven months of frenzied imports (October 2013-April 2014 imports reached 843,800 tonnes, almost double y-o-y), we believe imports will ease significantly from May 2014 and return to historical averages over the rest of the year. Imports have been boosted as traders in China have been stockpiling milk powder ahead of a drastic change in quality import requirements in May.

    Table: China - Select Commodity Imports
    Unit May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14
    Industrials
    Oil (Refined) mnt 4.0 3.3 3.3 2.6 3.0 2.9 2.8 3.4 3.8 2.4 2.4 2.5
    % Chg y-o-y 15.3 11.9 5.2 14.7 -11.1 -8.8 -19.4 -18.8 -3.8 -28.7 -24.3 -34.7
    Oil (Crude) mnt 24.0 22.2 26.1 21.4 25.7 20.4 23.6 26.8 28.2 23.1 23.5 27.9
    % Chg y-o-y -6.0 2.1 19.6 16.5 27.9 -13.8 0.8 13.1 11.9 10.9 2.0 20.8
    Copper (Refined) kt 237 282 297 269 352 297 333 317 402 283 329 346
    % Chg y-o-y -23.1 10.7 14.9 5.0 18.0 26.5 30.6 30.8 61.2 29.5 48.1 84.4
    Iron Ore mnt 68.6 62.3 73.1 69.0 74.6 67.8 77.8 73.4 86.8 61.2 74.0 83.4
    % Chg y-o-y 7.4 6.8 26.4 10.5 14.7 20.2 18.3 3.4 32.5 8.6 14.6 24.2
    Coal (Total) mnt 23.2 18.0 22.8 22.3 22.3 20.5 23.1 27.9 28.1 17.4 18.9 20.8
    % Chg y-o-y 13.0 -19.9 12.6 29.0 50.0 22.3 -1.9 -3.9 11.5 -3.8 -8.1 -11.3
    Coal (Coking) mnt 6.5 4.7 5.9 6.3 7.3 6.1 6.6 8.0 5.7 3.5 3.7 6.5
    % Chg y-o-y 68.0 -27.6 49.7 145 200 67.8 13.5 5.7 -20.3 -34.5 -19.5 -6.9
    Coal (Other)* mnt 16.7 13.3 16.9 16.0 15.0 14.5 16.5 19.9 22.4 13.9 15.1 14.4
    % Chg y-o-y 0.3 -16.8 3.7 8.8 20.9 9.8 -7.0 -7.3 24.1 9.1 -4.7 -13.2
    Grains
    Soybean mnt 5.1 6.9 7.2 6.4 4.7 4.2 6.0 7.4 5.9 4.8 4.6 6.5
    % Chg y-o-y -3.4 23.3 22.7 44.1 -5.4 4.0 45.0 25.6 23.6 65.9 20.3 63.3
    Corn kt 66.7 7.8 72.7 10.7 1.6 39.1 798 821 651 480 48.2 93.1
    % Chg y-o-y -42.7 -98.5 -89.9 -98.2 -99.6 -91.2 108 209 64.0 21.8 -79.7 -77.8
    Rice kt 161 163 141 114 143 141 181 208 200 139 152 322
    % Chg y-o-y -62.4 -23.3 -37.0 -52.2 -39.0 30.5 23.4 -3.4 -34.3 15.4 -43.2 6.9
    Softs
    Sugar kt 340 40.0 500 570 590 710 480 430 289 160 411 273
    % Chg y-o-y 36.0 -89.5 25.0 -1.7 0.0 109 269 59.3 20.3 100 95.8 -24.3
    Palm Oil kt 474 298 488 537 469 415 570 653 557 566 452 487
    % Chg y-o-y 27.9 -24.1 3.3 17.4 -11.9 -35.0 -12.9 -31.6 17.7 33.6 -23.5 -17.4
    Cotton kt 350 270 340 280 200 140 170 610 292 250 222 224
    % Chg y-o-y -30.0 -43.8 -17.1 -9.7 -23.1 -48.1 -43.3 15.1 -36.4 -34.2 -58.1 -47.8
    Source: China General Customs Administration, BMI. kt = '000 tonnes, mnt = mn tonnes, *predominately thermal coal.

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    Sector: Oil & Gas, Mining, Freight Transport, Commodities, Metals, Shipping
    Geography: Global, China
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