Business Times - 12 Jun 2009
By KEITH BRADSHER
STRONG buying by China has helped lift commodity prices around the world this spring, but growing evidence suggests that a sizable portion of this buying has been to build stockpiles in China, and may not be sustainable. At least 90 large freighters full of iron ore are idling off Chinese ports and waiting up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.
Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminium, copper, nickel, tin, zinc, canola and soya beans. Starting in April, China began stockpiling significant quantities of crude oil.
China's goals vary by commodity. Chinese companies have bought iron ore heavily on the spot market in anticipation of higher prices in annual contract talks now nearing completion. The Chinese government has been stockpiling oil and some metals for strategic reasons, and bought huge quantities of aluminium and canola to insulate domestic producers of these goods from falling global prices over the winter. 'There has been enormous stockpiling of all commodities' by China, and this cannot continue indefinitely, said Tim Huxley, the chief executive of Wah Kwong Maritime Transport Holdings Ltd, a big shipping line based in Hong Kong.
Those extra purchases beyond China's daily needs have helped reverse the price collapse in commodities that followed the economic downturn last fall, but could also limit the scale of the rebound. Moody's Investors Service announced on Wednesday that it was putting a negative outlook on the base metals, mining and steel industries in Asia and the Pacific, having previously done so for these sectors elsewhere.
'China's strategic stockpiling and replacement of lower-quality domestic production with higher-quality imports have supported the recent rally in prices for many base metals, but we will not see a sustainable turnaround in demand until the major economies of the US, Europe, and Japan recover,' said Terry Fanous, a senior vice- president in Sydney for Moody's, adding that the leading economies were not likely to recover until next year.
The Standard & Poor's GSCI, an index of global commodity prices, has risen 41 per cent from its low on Feb 18, but is still less than half its record, set on June 9 last year. One of the best leading indicators of international trade in commodities is the Baltic Exchange Dry Index, which measures the daily cost of chartering a large freighter. While the Standard & Poor's GSCI has continued to rise in the last week, the freight index has fallen by a fifth in that period.
Richard Elman, the chief executive of the Noble Group, Asia's largest diversified commodities trading company, bounced up from the conference table in his office in Hong Kong when asked about freight rates during an interview on Tuesday morning. He walked over to his desk, dominated by three computer screens that partly obscure a perfect view of Hong Kong's harbour, and quickly punched up on the left-hand screen a list of daily charter rates for large bulk carrier freighters.
The list showed ship owners charging US$58,000 a day now but just US$24,000 a day for charters next year or in 2011 - an indication that there will be more ships than cargo in the years ahead, particularly with shipyards still finishing vessels ordered during the recent boom. Pointing to the rates for the next two years, Mr Elman said: 'That's the real market' for ships.
Optimistic over China's economy
From an immense new sugar mill in Brazil to an extensive coking coal operation in Australia, Noble is active in commodities around the globe, and its stock has nearly quadrupled since its low on Oct 24. Mr Elman voiced optimism about the future of the Chinese economy and of worldwide demand for commodities, but cautioned that for some commodities, 'the futures prices have gone ahead' of the prices for physical delivery.
According to JPMorgan, China's iron ore imports were 33 per cent higher in April than a year earlier. Crude oil imports were up nearly 14 per cent, aluminium oxide imports climbed 16 per cent and refined copper imports jumped 148 per cent. Imports of coal soared 168 per cent as Chinese utilities bought more foreign coal while trying to negotiate better prices with domestic producers.
Determining the percentage of each commodity that is being stockpiled is difficult, especially in China, where scant data are released. Assessing steel demand, in particular, has become a subject of almost obsessive interest among many shipping executives and economists as a barometer of emerging markets' health and as an indicator of demand for everything from iron ore to ships to cars.
Sanjay Mehta, one of the four managing directors of Essar Global, the big Indian multinational in steel, shipping and other heavy industries, estimated that North American steel mills are operating at 50-60 per cent of capacity, Chinese steel mills at 70 per cent of capacity and Indian steel mills at 100 per cent of capacity.
The resilience of the Indian economy is helping to sustain demand for commodities, Mr Mehta said. But he was cautious about the global economy. He suggested that part of China's purchasing over the last several months represents an effort to rebuild inventories that were drawn down during the autumn and winter.
'It is not all related to consumption,' he said, predicting that prices would stay roughly at current levels through the middle of 2011. Prices of many commodities have jumped sharply in recent months - spot oil prices, in particular, have doubled since late December. That is driving up the price of petrol and diesel in many countries, including the United States.
Steel demand in China is already recovering for types of steel used in construction, Mr Elman said. Local, provincial and national government agencies are ramping up investments quickly as part of economic stimulus programmes. But demand has been slower to rebound for higher grades of steel used in consumer products, despite US$1 billion in Chinese government incentives for the purchase of cars and household appliances, particularly by residents of rural areas.
Some economists are bullish on commodities because they believe that the United States and European economies are on their way to recovery. 'The commodity price rally is for real,' said Ajay Kapur, the chief global strategist at Mirae Asset, a big Korean financial firm. 'I'm not expecting any huge correction from here.' Other executives, particularly in shipping, are less optimistic, and see signs of a bubble in freight rates and commodities that may repeat the sudden rise and fall of prices last year.
'The past two weeks have been nuts and, rather than cheering this sudden comeback of the dry bulk market, I do have a considerable amount of concern that we are seeing the same bubble again,' Kenneth Koo, the chairman and chief executive of the Tai Chong Cheang Steamship Company Ltd, another big Hong Kong shipping line, wrote in an e-mail message. 'And like that past bubble, it's not going to sustain.' - NYT
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