Barclays - Feeding the Dragon

China’s May commodity trade data show a slightly more diverse set of developments compared with the across-the-board strength seen earlier this year. In particular, there has been a modest pull back in imports of some key commodities including iron ore and soybeans, reflecting, in our view, an end to some of the aggressive stock-building, both private and government sponsored, that has helped support import demand growth so far this year. We suspect that other commodities where these factors have also been important, notably the base metals and especially copper, are also set for a period of lower import levels in the months ahead.

In energy markets, imports were very strong in May. A notable development was further very strong growth in China's coal imports, setting a record high at 9.4mn tonnes. Net crude oil imports also stayed strong, hitting their second highest level ever. To some extent higher coal imports reflect a decline in local supplies because of low prices, whilst in oil high levels of refined product exports somewhat offset the strong crude oil import numbers. Overall, however, the trade figures still support a view of rising energy demand in China.

The move in copper and nickel imports to all-time highs may represent a 2009 peak, in our view, as restocking in these sectors is well advanced and local price premiums no longer support arbitrage trade. Strong palladium imports are mainly a reflection of the recent strength of the domestic auto sector and are likely to continue as long as sales keep growing. Finally in cotton a third consecutive month of growth in imports is encouraging in light of the dependence of global trade and prices on the needs of China's textile industry.