Is China leading a global rebound?

A read on China's economy through the lens of basic materials imports...

Elizabeth Collins, CFA 6 May, 2009 | 9:30AM

Given the news of China's surging raw materials imports in the first quarter, it would be easy to jump to the conclusion that the country is quickly on its way to recovering its former economic vigour. Copper and iron ore imports are breaking records, coal companies expect China to become a net importer for the first time in 2009, and the country's demand for imported virgin fibre has surged in recent months. However, after looking at the data more closely, a few themes emerge that point to alternative explanations for China's apparently healthy appetite for raw materials. Further, while we see signs that China's stimulus plan is taking hold, other trends in raw materials corroborate the fact that China's export activity is still relatively weak.

China appears to be stockpiling some key materials for strategic purposes
China is the world's largest consumer of copper, accounting for 27% of world demand in 2008, and it's also the largest importer. China's imports of copper rose 33% in the first quarter of 2009 over the year-ago period, according to the country's customs agency. This surge in China's imports is likely partly responsible for copper's rise from below $1.30 per pound in late 2008 to around $2.00 today. Rumours abound that China's State Reserve Bureau (SRB) is building strategic inventories of copper, although this is hard to independently verify because SRB inventory levels are not public information. However, strategic purchases of copper at this point make sense for two possible reasons. First, copper is an actively traded hard asset that can be used as a store of value by those worried about a potential decline in the US dollar. Second, China may simply be taking advantage of an opportunity to "buy low" for a commodity that's an important component of economic activity (copper traded hands for $4.00 in July 2008).

China's stimulus plan seems to be driving demand for infrastructure-related materials
Although demand for coal from the power sector declined in the first quarter of 2009, according to the China Electricity Council, Chinese coal production grew in the first quarter and imports have been strong in recent months. This apparent disconnect can be explained by the relative mix of demand for coal. While in the United States the lion's share of coal goes into electricity generation, in China the industrial sector claims a significant but still-small share of coal output. It's possible that demand from coal-intensive infrastructure-related industries--such as cement--is supporting overall demand for coal. China is the world's largest producer of both coal and cement.

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About Author

Elizabeth Collins, CFA  is an associate director of equity research with Morningstar.

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