If one were to read any bullish note on any commodity this year, it all really boils down to a single bullet point: Chinese demand to return!
This “hope” or rather wishful thinking is the only reason why most chased oil, copper, and a host of other base metals early this year as money rushed into Chinese markets that had lagged all of last year, once their economies reopened. Traders buy first, ask questions later. But this time, there has been zero follow through from the physical flow in these commodities to match the related demand in financial commodities.
As China pumped money into the system to stimulate the opening of their economy late in Q4 post ending their zero-Covid strategy, this caused a massive rush to buy anything China related. Looking back at commodities, especially the likes of oil and copper that fell 50% and 30% last year, respectively, the upside call is predicated on China returning back to the market at some point this year.
Copper has rallied about 25% since the October lows on hopes that China would boost its massive infrastructure projects which would warrant more copper. Oil prices have failed to rally and are still trading close to their October lows. This is despite Russian sanctions placed on oil and China having ended its zero-Covid strategy.
Nickel and aluminum have all given back their gains from January. It is easy to look at a price and look for an eventual rebound of barrels from China to call a “tighter” market going forward. But it is never really that simple as China is too smart for that and plans in advance. China is well stocked for now and currently it is taking all the cheap Russian barrels to then refine it and send it back out as products. But it is also using up its own onshore inventories to do this, demanding less OPEC barrels.
As the two sessions CCP party meeting was held over the weekend, there were whispers that China would announce further economic measures to boost its GDP target. They maintained a target of 5% GDP growth, which was a bit lower than last year’s 5.5%. More importantly, they stated their focus on creating more jobs, lowering the cost of living for the Chinese people and promoting them to have more children, incentivizing them.
China’s demographics are playing a big role in driving their policies as they need to get their birth rate higher, and thus China’s focus on the domestic consumer. The party maintained support for housing, but this does not necessarily mean outright stimulus to be thrown at the sector either. Their goal is to support it, not let it collapse. This is very different from their policies of the past decade.
Chinese import data released for February showed crude oil imports were 84.06 million tonnes for the first two month, which is equivalent to 10.40 million barrels per day (bpd). This was 1.3% below the same period in 2022 and was also lower than the 11.32 million bpd seen in December and the 11.37 million bpd in November. In addition to this, Natural gas imports, fell about 9.4% in the first two months to 19.93 million tonnes. With a mild winter and China using more domestic coal, this put less pressure on them to demand gas via pipeline or LNG. Imports of unwrought copper also disappointed, slipping 9.3% in the January-February period to 879,000 tonnes.
The long-awaited China reopening bullish narrative looks to be in serious doubt, as the hype fizzles out as reality sinks in. At the end of the day, speculation only works if the physical market follows. It is the latter that is refuting the bullish analyst calls so far this year.