Is China’s appetite for commodities coming to an end?

China , Commodities , Iron ore , Metals May 25, 2012 1 Comment

Iron pipeIn the last few days, Chinese customers started to either require deliveries to be postponed, or they simply refused shipments of iron or coal, mainly for the steel industry. For example, a large Chinese company postponed delivery of 6 million tons of iron.

This is the kind of Information that has a chilling effect for the three major iron exporters as China absorbs more than half of the world production. This is not the first time such a blip occurs and it could become self-sustaining. Seeing lower prices on the spot market, Chinese buyers, being savvy traders, are in no hurry to receive orders placed at a much higher price.

The spot price may well return below 120 dollars per tonne this spring, the lowest level recorded last fall. It is better to buy on the spot market in small quantities rather than paying big money for a product that will not be used right away. And it is precisely the root of the issue: it is the uncertainty over the future which dramatically increases iron stored in the ports warehouses. Several indicators support the hypothesis of a slowdown: electricity production and rail freight services have both decreased.

In April, iron imports fell 8% from the previous month according to official figures published on monday. However over one year, the trend is still upward. And this is the key figure to remember, because for Chinese leaders, it’s out of question to live through the slowdown of 2008 caused by the financial crisis again. Growth will remain strong and stimulus measures will be used if needed.

On the other hand, the five-year plan anticipates a change in the type of growth, more consumption and less investment. In other words, no hard landing in sight, but rather a slowdown with a lesser appetite for industrial metals. This might be what can be seen in Chinese ports, turned into storage areas for ​​iron and other metals.

Is China‘s appetite for commodities since the beginning of the century coming to an end?

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Pascal Blanc

Pascal has implemented numerous software solutions in the areas of procurement, sourcing, spend management, supplier evaluation and performance. His clients include Fortune 500 companies in Europe, Asia and North America. He is a co-founder of Source & Procure.

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