Not all doom and gloom

When analysing China and Chinese commodity demand, two crucial facts should be recognised: firstly, China&rsquo;s economy is still fairing better than many other economies and, secondly, analysis of China&rsquo;s economy and commodity demand is often very flawed. In addition &ndash; and much more widely recognised &ndash; is the fact that China&rsquo;s economy has experienced a significant rebound that has been evident since March. Steel production Analysing China&rsquo;s crude steel production shows one example of just how much of a rebound China&rsquo;s economy has experienced since March. The first two months of this year saw China produce a total of only 121.1 million t of crude steel. This is 9.4 million t (-7%) less than was produced in the first two months of 2015 and marked a continued year-on-year decline in steel production that begun in 2015. However, since the end of February, a dramatic rebound has taken place in China&rsquo;s economy (even as tremendous problems continue to fester in China&rsquo;s financial system). March, April and May all saw year-on-year increases in Chinese crude steel production. In total, 210.6 million t of crude steel was produced in China over this period. This marked a year-on-year increase of 2.3 million t (1%).While in the past, 1% growth in Chinese steel production would have been considered poor, any growth now marks a dramatic change from the contraction in crude steel production that occurred last year. In addition, 1% crude steel production growth has also been much better than the situation outside of China. During March through May, global crude steel production outside of China totalled only 200.8 million t, which marked a year-on-year decline of 3.6 million t (-2%). May also marked the sixteenth consecutive month during which global crude steel production ex-China contracted on a year-on-year basis. The stark reality is that it has remained the world outside of China that in many ways continues to fare much worse than China. Overall, China&rsquo;s steel market has been doing better than the rest of the world &ndash; even with the intense problems that China has been experiencing. In addition, Chinese steel exports (while rising again this year) cannot be blamed as the primary cause behind the ongoing contraction in global steel production. The first five months of this year saw China&rsquo;s steel exports rise year-on-year by approximately 2.8 million t. However, during the same period crude steel production outside of China declined year-on-year by approximately 7.4 million t. The reality is that steel production ex-China has been contracting much more than China&rsquo;s robust steel exports &ndash; but a large amount of economic analysis continues to be focused only on Chinese steel exports. Often economic analysis routinely holds a very critical view on China (and rightfully so), but what is often overlooked is just how poorly industrial production has fared outside of China. Iron ore While Chinese steel production has only recently been able to achieve growth this year, iron ore imports have long been able to find great support and, in reality, are not dictated by Chinese steel production levels. During the first five months of this year, Chinese iron ore imports totalled 412.2 million t. This marks a year-on-year increase of 34.1 million t (9%). Data shows China&rsquo;s iron ore imports have managed to find strong support, even though the first five months of the year saw China&rsquo;s crude steel production decline year-on-year by 7.1 million t (-2%). A similar event was also seen last year as Chinese crude steel production contracted in 2015, but iron ore imports still continued to grow &ndash; with last year also marking the largest amount of iron ore ever imported by China. Overall, data throughout this decade has continued to show that iron ore port stockpiles do not limit Chinese iron ore imports and that China&rsquo;s iron ore imports can easily increase, even when Chinese steel production is declining. This remains a fact that is still not fully recognised in the shipping and commodity markets. Perhaps most telling was a very large surge in Chinese iron ore imports in 2H15, even as China&rsquo;s steel production was declining. China&rsquo;s monthly crude steel production averaged only 65.5 million t during 2H15, down from the average of 68 million t that was seen during 1H15. But Chinese iron ore imports still surged in the latter six months, hitting 500.3 million t, which was 47.2 million t (10%) more than was imported during 1H15. Throughout this decade, China&rsquo;s iron ore imports have been very strong, even when Chinese steel production has been falling or iron ore port stockpiles in China have been at robust and even record levels. It remains clear that global iron ore miners have been continuing to dictate the volume of China&rsquo;s iron ore imports and that China&rsquo;s demand for imported iron ore has remained very strong. At the time of writing, there have simply been no signals that China&rsquo;s iron ore import growth is set to come under pressure. Coal China&rsquo;s demand for coal imports has been weaker than Chinese iron ore import demand and, unlike in the iron ore market, coal imports are not dictated by global mining companies. Since 2014, Chinese coal imports come under dramatic pressure. Before 2014, coal imports had been rising throughout this decade and in 2013 surged to a record 328.5 million t. However, in 2014 imports began to fall, totalling only 291.6 million t. Last year then saw a much greater decline with China&rsquo;s coal imports totalling only 204.2 million t. Overall, one key issue is that, when dry bulk new-build orders were surging in 2013 and 2014, the market consensus was that Chinese coal imports would increase to around 350 million t in 2014 and 370 million t in 2015. However, 2014 ended up seeing Chinese coal imports come in at 54 million t less than the market had expected, while 2015 saw Chinese coal imports come in at 166 million t less than expected. The 2014 shortfall between market expectation and reality (54 million t) works out to an absence of 730 cargoes (working on the basis of solely a panamax cargo, for the sake of computation). Similarly, the 2015 gap between forecasts and reality works out at an absence of 2243 cargoes. This year, Chinese coal imports &ndash; like steel production &ndash; began the year under ongoing pressure but, just like steel production, coal imports were able to find support beginning in March. The first two months of this year saw China import a total of only 28.9 million t of coal. This is 3.1 million t (-10%) less than the first two months of 2015 and marked a continued year-on-year decline in coal imports. However, since the end of February, a rebound in coal imports has taken place. In total, 57.5 million t of coal was imported between March and May, which marked a year-on-year increase of 6.3 million t (12%).Overall, this year has seen China&rsquo;s electricity production rise year-on-year by approximately 2%, which is supportive to demand for imported thermal coal. With steel production also recently finding support, a positive factor in demand for imported metallurgical coal, coal imports stand a solid chance of ending this year showing growth. While, at best, only a small amount of growth is likely, any growth in imports would be.One negative issue to remain aware of regarding thermal coal imports, however, is that parts of China have been receiving much more rain than normal this year. Through the first five months of this year, China&rsquo;s hydropower production has increased year-on-year by 18%, a result of both the increase in rainfall and capacity expansion. This contrasts to last summer, when Chinese hydropower production contracted between July and September. In time, ongoing growth in China&rsquo;s hydropower production is expected to have a more pronounced impact on the market and, ultimately, will exert greater pressure on demand for imported thermal coal. Grain The grain market, on the other hand, is one segment of the commodity market where it is clear that Chinese demand will continue to grow on the back of an expanding middle class. As more Chinese citizens enter the middle class, demand for grain and meat will increase (grain is used for feed for livestock in addition to normal consumption). Soybeans Soybeans remain the most significant Chinese grain import; imports are expected to set yet another record. Domestically, China is expected to produce 12.2 million t of soybeans during the current 2016/2017 grain trade marketing year; imports are expected to total 87 million t. This would mark a year-on-year increase of 5.2 million t (7%) from the 81.8 million t of soybeans that China imported in 2015/2016, which stands as the current record. Overall, China&rsquo;s total soybean consumption is expected to rise to a record 100.8 million t. This would mark a year-on-year increase of 5.5 million t (6%) from the record 95.3 million t consumed in 2015/2016. China&rsquo;s soybean stockpiles are also expected to end the current 2016/2017 marketing year at approximately 14.5 million t; in comparison, stockpiles ended 2015/2016 at 16.2 million t. Coarse grain Chinese coarse grain demand is also expected to continue to grow. Domestically, China is expected to produce 225.7 million t of coarse grain during the current 2016/2017 grain trade marketing year, while consumption is expected to total 246.2 million t. This is 7.2 million t (3%) more than was consumed in 2015/2016. However, China has a huge amount of existing coarse grain stockpiles, allowing the country to reduce its imports. For 2016/2017, China is expected to import only 12.2 million t of coarse grain, which would mark a year-on-year decline of 3.8 million t (-24%). While China&rsquo;s domestic coarse grain production is expected to decline by about 6 million t during the current grain trade marketing year, more than 100 million t of coarse grain has been stockpiled throughout China. Stockpiles are expected to be destocked by roughly 10 million t, though, which will allow Chinese coarse grain consumption to increase, even as domestic coarse grain production and imports are declining. Conclusion In many ways China remains the envy of much of the world. Economic growth has certainly slowed, but steel production during late 1Q16 and much of 2Q16 enjoyed a resurgence &ndash; and the Chinese steel market has all along continued to fare better than in the rest of the world. Chinese iron ore import demand has also stayed strong, even during periods of declining steel production and as iron ore port stockpiles have remained robust. China&rsquo;s coal import demand has not been fairing nearly as well as iron ore import demand, however, but there is a solid chance this year that coal imports will end the year showing growth. In addition, soybean imports are all but guaranteed to set another record this year. About the authorJeffrey Landsberg is Managing Director at Commodity Research &amp; Consultancy, USA.

Not all doom and gloom

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