China Commodities and Metal Demand To Ignite in H2 2012

China is the behemoth for energy demand and consumption and any time there is a slowdown, the global financial markets get nervous.

To put it into perspective, the International Energy Agency (IEA) confirmed that China consolidated its position as the world's largest energy consumer, as it will consume nearly 70 percent more energy than the US by 2035, the group said in its most recent benchmark World Energy Outlook report.

Using another example in market specificity, in the IEA's Medium Term Coal Market report, global demand for coal will "continue to expand aggressively over the next five years" and "that global implications of China's massive appetite for coal, noting that events and decisions in China could have an outsized effect on coal prices."

Furthermore, China's domestic coal market is more than three times the global coal trade. It is also currently the world's largest consumer of iron ore, coal and other base metals.

So when media reports surface that Chinese buyers are deferring or have defaulted on coal and iron ore deliveries, following a drop in prices, many market participants take this as a sign that worldwide economic woes are finally taking its toll on China's ferocious energy appetite.

In a Reuters story, citing un-named sources, one trader said "We ourselves have had one of our buyers default on us after just a few hours. We sold the cargo to an end-user in China and a few hours later the buyer came back, saying 'the market's falling too fast we want a lower price'."

News that China demand growth slowed sharply in April, hitting its lowest in nearly a decade, around other metal markets as well, doesn't help.

"Slowing commodity appetite in China is reflected in the latest trade-flows data," said RBS in a research note. "Refined copper imports fell for the second consecutive month in April, to reach an eight-month low, hurt also by the unreported inventory overhang that is in place in the country. Iron ore imports fell to levels unseen in six months, in line with the decline in crude steel production. Chinese iron ore port inventories remain high at 95mt. Notwithstanding the declines, both copper and iron ore import levels remained elevated - this is not a repeat of 2008-09. Nickel ore and bauxite imports, in contrast, rose, likely reflecting buying in anticipation of the impending export ban in Indonesia."

Yes - demand is slow at the moment but some sensationalist headlines probably don't seem to successfully highlight the long term positives, hidden underneath slowing demand data.

"The slowdown in China demand is no secret; it's a trend" says Nikos Kavalis, metals analyst at RBS. "Copper, for example, is a market where imports were at a strong level in previous months but slowed down after China built up stockpiles. The price movements and slower demand is just an absorption measure, a natural outcome. The slowdown is from extremely strong levels of growth and whenever there is a stock build up, there will be an inevitable for a weak patch, but by no means do I accept or believe that China is a saturated."

The first quarter of this year was actually hailed as a surprise to many in the market. In Q1 2012, refined copper imports surged 40 percent, compared with the same period last year. Iron ore imports also revealed a strong appetite from China, with imports up 5.6 percent in the first quarter.

However, over April and according to recent spot data, metals across the board received less demand from China, which has therefore pulled down prices.

Only Monday did April Chinese trade data reveal that there was a decline in zinc concentrate imports, the lowest level in over four years. Barclays Capital said in a recent research note that the drop in zinc concentrate is due to lower demand from China smelters.

Elsewhere, iron ore spot prices has fallen 12.4 percent off its highest peak in 2012 today and has dropped for the 10<sup>th day in a row.

"There are two elements for why not to worry," says Kavalis. "In the short term, copper is purely a reflection a stock build up and therefore buyers don't really need to go into the markets at the moment. You can see from hefty exports that there is a lot of material in the country. In the medium term, China will not be growing at the same rate as it had previously done, under the 5 year growth plan. Years of easy, fast growth have gone and more than anything, the country's authorities have shifted their focus away from growth being as high as possible to a more savvy and technology orientated, added-value internal consumption model."

Analysts are right. Reports on China buyers pulling out of contracts and slow demand in April alone seem like China demand is hitting a wall, but in fact, is not as dire as some headlines led to believe.

"You have got to put the picture into perspective," says Robin Bhar, metals analyst at Société Générale. "When looking at China data from April, the numbers are down month on month but are actually still significantly up on the year ago level. "Our China economist is seeing further slowing to China and has downgraded GDP to 7.9%, which is fairly slow for China, when previous years have shown 9 - 10% growth. However, this is what the government wants. The Chinese government wants to engineer a slowdown and curb inflationary pressures and balance the economy, by leading to more domestic consumption."

Charlie Sartain, head of mining giant Xstrata's copper unit said that the group expects Chinese demand for copper to improve in the second half of this year, just as the firm revealed that it is about to boost output by around 60 percent over the next three years.

"We typically see a cyclical return to demand in the second half of the year in china," said Sartain at a conference in Sydney Australia. "We still have a view that the first half was always going to be slower from a copper demand point of view."

Furthermore, the Chinese government has actively tried to curb inflation and steer away on a purely speedy growth focus for the economy and last night confirmed that it is looking to fast track approvals for infrastructure investment to combat slowdown in the economy.

Today, the Organisation for Economic Co-operation and Development (OECD) said Chinese growth is likely to slow to 8.2 percent this year, 0.3 percent lower than its original forecast in November last year, even before government support helps it rebound to 9.3 percent in 2013. However this is still higher than the government target of 7.5 percent for 2012.

"We think the recent drop in demand is a short term phenomenon and China growth demand will improve by the end of this year and will eventually show a faster growth rate in 2013 as the government try to stimulate the economy. There is the danger that growth will slow too sharply but the government wants to prevent this. There will be a short-term negative outlook for metals but structurally China needs to import materials like iron ore, so we could see a rebound from the end of this year going into 2013."