China Imports: Slowdown Underway, Weakness Ahead

  • We expect strong 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 cooled in May, with copper shipments rising by 21.2% y-o-y, a sharp slowdown from 84.4% y-o-y in April 2014.

  • 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 and domestic demand growth slows.

  • 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. China's HSBC Flash Purchasing Managers' Index (PMI) reached 50.8 in June, easily outgunning consensus expectations of 49.7 ( see 'Surprise PMI Print Elicits Upside Risk to Growth', June 23). However, major headwinds ranging from cooling real estate prices to broader financial system stresses will cap growth over the coming quarters.

Industrial Commodities: Struggles Ahead

Economic Rebound To Be Short-Lived
China - HSBC Purchasing Managers' Index (PMI) & Industrial Production (% chg y-o-y, RHS)
  • We expect strong 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 cooled in May, with copper shipments rising by 21.2% y-o-y, a sharp slowdown from 84.4% y-o-y in April 2014.

  • 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 and domestic demand growth slows.

  • 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. China's HSBC Flash Purchasing Managers' Index (PMI) reached 50.8 in June, easily outgunning consensus expectations of 49.7 ( see 'Surprise PMI Print Elicits Upside Risk to Growth', June 23). However, major headwinds ranging from cooling real estate prices to broader financial system stresses will cap growth over the coming quarters.

Economic Rebound To Be Short-Lived
China - HSBC Purchasing Managers' Index (PMI) & Industrial Production (% chg y-o-y, RHS)

Industrial Commodities: Struggles Ahead

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

More Weakness In Sight
China - Select Commodities Imports (% chg y-o-y)

Copper: Slowdown Inevitable

We expect growth in Chinese refined copper imports to come under pressure over H214. China's refined copper imports expanded by 21.2% y-o-y in May, a marked slowdown from 84.4% y-o-y in April. Financing demand for the metal will continue to face intense scrutiny following the financing probe in Qingdao in early June ( see 'Financing Crackdown Intensifies: What Implications?', June 04). Anecdotal evidence suggests that many banks are starting to withhold letters of credit used in commodity-backed deals. A handful of banks have also demanded their clients to shift metal to more regulated London Metal Exchange (LME) warehouses outside of China.

Growth Has Peaked
China - Copper Bonded Warehouse Stocks

Iron Ore: To Be Dragged By Distressed Steel Sector

We expect Chinese import growth for iron ore to lose strength in the coming months, having expanded by 12.9% y-o-y in May. Many Chinese steelmakers will struggle to sustain operations in light of weak profit margins, shrinking bank credit and the government's edict to slash overcapacity across heavy industry.

Tough Digging
China - Iron Ore Grade (Fe %)

That said, we do not expect Chinese iron ore imports to collapse over the medium term. Chinese steelmakers will remain reliant on high-grade seaborne ore as the push to curb environmental pollution gains traction. Indeed, many domestic miners are battling with a rising cost base caused by depleting reserves and falling ore grades.

Thermal Coal: Supported By Electricity Demand

We believe the weakness in Chinese coal import growth since February 2014 will not be sustained over H214. China will remain dependent on seaborne coal for sufficient power generation over the next decade. The country has limited alternatives to burning coal, with domestic gas output insufficient and liquefied natural gas (LNG) imports considerably more expensive.

Recovery On The Horizon
China - Coal Imports (% chg y-o-y)

Crude Oil: Imports Continue Uptrend

We continue to highlight that growing refining capacity and production will fuel China's crude import needs, given domestic crude production limitations. Crude oil imports rose 8.9% year-on-year (y-o-y) in May to 26.1mn tonnes.

Refining Demand Supports Crude Imports
China - Crude Oil Imports (LHS, mn tonnes) & % chg y-o-y (RHS)

Crude oil production rose 0.2% y-o-y to 17.8mn tonnes in May 2014. After inventory change of about 1.3mn tonnes has been taken into account, we estimate that real crude demand came in at 42.6mn tonnes in May 2014 (about 10.1mn b/d), which was a 5.5% y-o-y rise from May 2013 as domestic refining demand for crude oil continues to increase.

Real Crude Demand Growth Remains Positive
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 5.0% y-o-y to 10.4mn b/d in 2014. Crude oil imports should continue to increase y-o-y through to August 2014 to meet refinery demand over its peak season. Moreover, several refineries - including Sinopec's Changling, PetroChina's Dalian and Dagang, and Shaanxi Yanchang Petroleum's Yan'an plants - restarting production after maintenance will support crude oil demand over the summer. Given limited scope for domestic crude oil production growth, this will support crude imports as the diverging trend between crude and refined oil import growth continues.

Diverging Pattern To Continue
China - Crude Oil & Refined Oil Imports (% chg y-o-y)

However, we note that the spike in oil prices from about USD110/bbl in May 2014 to USD115/bbl in late June could limit crude import growth in June should China chooses to draw from its inventory - currently at a record 33.6mn tonnes.

Healthy Inventory Level Offers Option To Loosen Crude Imports
Monthly Front-Month Brent (LHS, USD/bbl) & China Crude Inventory Levels (RHS, mn tonnes)

Refined Oil: Import Weakness To Persist

Our view that refined oil imports will trend downwards on the back of China's rising domestic refined production capacity continues to play out. In May 2014, China imported 1.8mn tonnes of refined oil - its lowest level of refined oil imported since data was made available in 2005. Refined imports fell 54.8% y-o-y, which is also the biggest decrease that China has seen.

Refined Oil Imports Continue To Weaken
China - Refined Oil Imports (mn tonnes, LHS) & % chg y-o-y (RHS)

We do not expect a strong rebound in refined oil imports as domestic refined production will continue to grow. While fuel oil imports in May 2014 hit the lowest level since 2005, domestic fuel oil production remain at historical highs.

Strong Domestic Output Cuts Into Import Needs
China - Fuel Oil Imports & Domestic Production (mn tonnes)

A slight fall in diesel production and inventory levels in May 2014 will be negated by the return of Chinese refineries from maintenance over the summer of 2014. Moreover, we continue to highlight weak growth in real diesel demand, which we estimate to have seen negligible y-o-y growth in May 2014. Thus, we maintain our view that weak refined oil import demand will persist in China.

Negligible Diesel Demand Growth To Limit Import Rebound
China - Real Diesel Demand (LHS, mn tonnes) & % chg y-o-y (RHS)

Grains: No Repeat Of 2013/14's Record Imports In 2014/15

Wheat and soybean imports could see a temporary revival in the coming months, as international prices have eased significantly whole Chinese prices are on an uptrend, making imports attractive. 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.

Imports Regaining Attractiveness
Price Ratio - China/Relevant International Benchmark

Similarly, attractive import prices of wheat will help wheat imports head higher on a three-to-six month horizon, after several months of decline. Over the 2014/15 season (starting in July), however, 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.

Broadly Decreasing
China - Select Commodities Imports (mn tonnes)

Corn imports will remain low in the coming months, as China strengthened restrictions to US corn shipments. The country's quarantine agency stopped issuing permits for imports of US's distillers dried grains (DDGs) in June 2014, as the government deems the product as having a high risk of containing MIR 162, a non-approved genetically modified strain of corn. China will eventually be forced to import again large volumes of corn, as we expect the country to only record relatively small production surplus in 2014/15. Domestic corn prices have already rallied recently on tight supply, which should increase the attractiveness of international corn.

Oversupply
China - Sugar Ending Stocks & Imports ('000 tonnes)

Softs: Imports Easing

China's softs imports will ease (milk powder) or remain below the elevated levels reached in 2012 and 2013 (sugar, cotton, palm oil) over the coming months. After eight months of frenzied imports (October 2013-May 2014 imports reached 930,000 tonnes, almost double y-o-y), we believe milk powder 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.

Slower Import Growth Ahead
LHC: China Soy Oil/International Palm Oil Price Ratio; RHC: China Palm Oil Imports ('000 tonnes)

Sugar imports will remain below the elevated levels seen in 2013 in the coming months, as record high sugar stocks, coupled with unattractive international prices will rein in imports. Ending stocks for the ongoing 2013/14 season are estimated to reach 8.5mn tonnes, compared with the five-year average of 3.7mn tonnes. Over the coming years, however, China's sugar imports will remain historically elevated, as production growth cannot keep up with consumption expansion. Palm oil imports will also remain below 2013's levels, as soy oil prices in China are at their lowest levels in over seven years, which deters imports of palm oil, a traditional alternative vegetable oil.

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, Agribusiness, Metals, Shipping
Geography: Global, China
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