Nowadays, when China sneezes, the rest of the world catches a cold, and this is true with its demand for raw commodities. According to the World Economic Forum in 2015 China consumed 54% of global aluminum, 31% of cotton, 23% of gold, 17% of wheat and 10% of sugar. But it seems the largest consumer of the world’s commodities could go on a diet, as growth drops to 6.5%, debt balloons and regulators clamp down on futures market speculation. How much will that hurt commodity prices given that roughly 1.4 billion Chinese still have to be fed, clothed and kept warm and many now expect a working infrastructure?
We asked some commodity analysts for their views on how China’s crackdown on speculation and economic slowdown will affect key commodity complexes and prices going forward.
Although China is the largest consumer of coal in the world, in April 2015 it also became the world’s largest importer of crude oil, surpassing the United States, purchasing 7.4 million barrels a day.
According to the OPEC April 2016 report, Chinese crude oil imports in February 2016 were 8 million barrels a day, representing a 27% jump over January imports. Its largest suppliers are Saudi Arabia (17%), Angola (15%) and Russia (12%), according to the OPEC report.
In addition, petroleum product imports increased dramatically. So despite the cooling economy, China still has a growing appetite for oil. OPEC also noted that a growing Indian economy would pick up the slack from any decline in Chinese oil imports.
Dan Dicker, energy trader, author and TV prognosticator, had this to say about China’s energy needs: “The Chinese have a habit of buying and storing commodities not based upon their needs, but upon their ability to think they know where the bottom of prices are likely to fall. They’ve done this (somewhat successfully) with copper for years, and it looks like they’re doing it with oil right now.
“What does this mean for the prospects of the Chinese economy? For me, it says that the Chinese aren’t much worried and they think they have several tricks left up their sleeve to assure a soft landing at worst — and are willing to part with cash to reload on raw commodities here at low prices.”
Although the government is clamping down on China’s commodities exchanges, China still consumes a lion’s share of key base metals. The World Economic Forum states that in addition to consuming 54% of the world’s aluminum, China accounts for about half the global consumption of nickel (50%), copper (48%), zinc and tin (46%), steel (45%) and lead (40%). Given these statistics, how much will China’s slowdown reduce the need for the base metals and pressure prices on the downside?