Chinese trade data for September, released last week, brought concerns over the current health of China’s economy back to the forefront of investors’ minds.
The sharp decline in imports, down 20.4% from September 2014, was significantly larger than the 13.8% drop of August and market expectations for a decrease of 15.0%, and saw concerns about Chinese demand for raw materials intensify once more.
However, is the decline in imports a sign that Chinese demand is falling off a cliff, or simply a sign that commodity prices – led by a surge in seaborne supply – have fallen dramatically in recent years?
According to this chart from Bank of America-Merrill Lynch, it certainly appears to be the latter. It tracks Chinese imports of iron ore and concentrates on a 3-month moving average basis.
While the value of iron ore imports have fallen steeply since the start of 2014, something that is reflective of the headline decline in Chinese import values, in volume terms they hit the highest level on record in September.
This hardly suggests that Chinese demand is tanking. Yes, growth in iron ore imports has slowed, but it’s still trending higher, not lower.
As BAML note, “similar patterns are seen across a number of other commodities, suggesting that excess global supply has been a bigger factor than a dramatic drop in Chinese demand as the ‘commodity supercycle’ comes to an end”.
There are few better examples of this than this chart, shown below, tracking iron ore exports in the millions of tonnes from Port Hedland, Australia’s largest iron ore loading port.
And as a result of booming seaborne export volumes, not only from Australia but Brazil and elsewhere, the spot iron ore price has copped a hammering since 2011.
This clearly fits with the view that supply of raw materials, rather than weak Chinese demand, has led to not only the decline in Chinese iron ore import values but also commodity prices.
While this impacts those nations that supply raw materials to China by lowering income levels, it does not imply that Chinese demand is falling.
Far from it, in fact.
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