China bought substantially more copper and iron ore in July than June, offering a rosy view of the world's second-largest economy, although surprisingly weak crude imports jarred. Investors are hoping the economic strength of the world's top commodity buyer will help lift prices pummelled by fears the United States may be recession-bound and by a raging debt crisis in Europe.
With its two largest trade partners facing the prospect of anemic growth for years, China is vulnerable to a slowdown that could crimp its role as the main support for commodities demand.
"All the data is pointing to a healthy economy and robust demand. With that, buyers would likely see the recent correction in oil and commodities prices as a buying opportunity," said Nicholas Zhu, a Shanghai-based analyst at ANZ Bank.
But unlike 2008, when Chinese firms had access to cheap credit as Beijing poured out trillions of yuan to bolster the economy through the financial crisis, higher borrowing costs mean it would be more costly to finance stockpiles. As the country embarks on building millions of affordable homes, raw materials tied to the construction sector, such as copper, iron ore and coal, would have an edge over others such as aluminium and zinc.
Lower prices for commodities since the start of the month should also encourage rebuilding of stockpiles. "Copper prices in China have shifted back to backwardation and that indicates there is healthy demand on the ground. Rising copper premiums in Shanghai should also start to lure consumers back to the import market," said Xinyi Chen, an analyst at Barclays Research.
For graphics on China's trade and production in July
WEAK CRUDE OIL NUMBERS
Bucking expectations of a rebound, China's crude imports in July fell from a month ago to hit a one year low of 4.58 million barrels per day, while implied oil demand rose by just 0.4 percent on the month. Traders said high costs and poor margins have prompted many refiners to either trim runs or extend maintenance programmes.
Implied demand, crude throughput plus net imports of refined oil products, was about 9.01 million barrels per day in July, up 7.7 percent from July 2010, Reuters calculations based on preliminary official data showed. Fuel consumption in the world's No.2 consumer has been easing since May from the double-digit expansion seen since last year as crude costs climb and China tightens credit.
But with the economy still exhibiting signs of solid growth and crude prices off sharply since the start of August, fuel demand could recover by September as oil firms wind up heavy maintenance schedules and start new refining facilities.
COPPER, IRON ORE
Imports of copper and iron ore, used by China's power cable fabricators and steelmakers, both climbed to multi-month highs, as factories took advantage of lower prices in May and June. China's copper imports rose 9.5 percent from a month ago to a six-month high, while imports of iron ore rose 6.8 percent to 54.55 million tonnes, its highest in four months.
Traders said Chinese investors and merchants had booked more spot refined copper in May and June when arbitrage ratios between London Metal Exchange and Shanghai prices improved from previous months.
But some analysts reckoned the rally in copper imports would be short-lived, saying domestic demand for copper had dropped in July from June as some fabricators cut production in the summer.
"The current picture is that imports in August should fall from last month. For the demand side, this month is in the middle of the seasonal lows," Minmetals Futures' Zhuo Guiqiu said.
