Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
China’s commodity trade data for 2022 shows that prices and volumes weren’t driven by the world’s biggest buyer of natural resources. The question now is whether 2023 will see China reassert its dominance as the main driver of commodity markets.
The market narrative for China’s appetite for commodities has largely moved on from what was a soft 2022 to expectations of a strong 2023. After all, the world’s second-largest economy is reopening and rebuilding after abandoning its strict zero-covid policies.
However, it’s worth looking at what did happen last year. There were differences in China’s 2022 commodities imports, and the trends established may persist for a while yet.
The obvious weak spots among major commodities were imports of crude oil and natural gas, which dropped 0.9% and 9.9% respectively in 2022 from the prior year.
Crude oil imports slipped for a second straight year to the equivalent of 10.17 million barrels per day (bpd), according to official data released on Jan. 13.
The blame is relatively easy to apportion: covid lockdowns cut domestic demand, while lower exports of refined fuels for the first nine months meant that these shipments fell 11% for the year as a whole.
However, the trend for crude oil imports and product exports shifted in the last quarter of 2022. Both gained strongly as the economy started to re-open and Beijing granted higher fuel export quotas in order to both boost the economy and allow refiners to capture some of the strong regional margins for products, especially diesel.
Crude oil imports rose 4% in December from the same month a year earlier, reaching 11.3 million bpd. Fuel exports, at 7.7 million tonnes, posted the highest monthly number since April and up 25% from November’s 6.14 million tonnes.
Natural gas imports, both from pipelines and as liquefied natural gas (LNG), were still weak in December, coming in at 10.28 million tonnes, down 11.8% from the same month in 2021 and a drop of 0.39% from November.
Natural gas imports are also in line to recover as China’s economy picks up speed.
But there is a note of caution, which also applies to crude oil: Whether Chinese utilities return to importing the volumes of LNG, which saw the country become the world’s top buyer in 2021 before losing the crown back to Japan last year, largely depends on the trajectory of spot prices.
China will continue to import LNG under long-term, oil-linked contracts, but matching the strong volumes of prior years depends on utilities making the judgment that spot prices are low enough to make the super-chilled fuel economically viable in China’s domestic market.
What the level of comfort is for spot prices in debatable. It’s likely to be well below the current spot price for delivery to north Asia of $23 per million British thermal units (mmBtu).
While the current price has been dropping steadily since reaching a record $70.50 per mmBtu in late August, it remains high by historic standards, having only once briefly traded above $20 prior to the start of 2021.
China’s refiners have also shown reluctance in the past to buy crude oil when they deem prices are too high, or have risen too far, too fast.
It’s likely that they will want to ramp up purchases in 2023 to meet rising domestic demand from the re-opening economy and ongoing fuel export quotas. But they may become cautious if prices start to head significantly higher than the $85.28 that Brent crude futures ended at on Jan. 13.
It’s also worth noting that China imported about 700,000 bpd more than it processed in its refiners for the first 11 months of 2022. That means refiners likely have ample inventories should they wish to boost throughput without lifting imports much.
Furthermore, the physical crude market works differently to paper futures such as Brent, with China’s imports for the next few months likely already largely arranged.
This means that should refiners plan to boost imports, it will take several months before this becomes apparent in the customs data.
Where a faster response to China’s reopening is likely is in commodities that can be more easily and quickly secured, such as iron ore.
Imports of the steel raw material dropped 1.5% in 2022 from 2021. But if China’s steel mills increase production amid the economy reopening then iron ore imports could rise quickly in coming months.
Coal imports could also tick higher, especially as Chinese buyers take advantage of Beijing’s decision to end its unofficial ban on imports from Australia, formerly the number two supplier.
While China may not import much Australian thermal coal, there is scope for a resumption of shipments of coking coal, used to make steel.
Another commodity potentially in line higher Chinese demand is copper, but it’s here where the biggest scope for disappointment may lie.
China’s imports of copper were actually one of the few strong points in 2022, with arrivals of unwrought copper gaining 6.2% and that for ores and concentrates rising 8%.
With the global economy expected to struggle for growth in 2023, there may be a question mark over how much more copper China’s export-focused manufacturing sector will require.
If manufacturing demand is soft, then the bullish copper story relies on the other uses of the industrial metal, mainly construction, and whether this will be enough to see China’s imports rise strongly in 2023.
Overall, China’s re-opening is positive for its commodity demand, but the reality is unlikely to be as linear and as certain as the market seems to be expecting.
(The opinions expressed here are those of the author, Clyde Russell, a columnist for Reuters.)
(Editing by Kenneth Maxwell)
Comments