China demand doubts

As equity and crude oil markets fall today on fears over China’s demand, two reports are saying China’s recent appetite for oil imports might not have been all that it seemed.

The Centre for Global Energy Studies says that China’s record demand for oil imports in July were mostly due to state-owned companies taking advantage of lower prices to build up stocks. That could be about to end:

The price surge may be running out of steam, though. Chinese commodity purchases have slowed as prices have risen, while the cheap loans made available through the country’s stimulus package may also be coming to an end. The Chinese economy has struggled to absorb the wave of money thrown at it through investment in infrastructure and the central bank estimates that as much as 20% of the credit has gone into equity markets.

No prizes for guessing what this could mean:

If this happens, the bullish sentiment of futures market players could prove shortlived, bringing to an abrupt end the recent surge in oil prices. The sustainability of China’s recovery and its recent spate of oil buying could thus prove critical for oil prices over the coming months.

Another report, by Royal Bank of Scotland, also casts doubt on how much of China’s record levels of commodity imports during the first half was intended for domestic demand. From the FT:

Restocking by China’s state commodity reserve bureau played a large part in the record import volumes, as did easy credit from state banks, which encouraged some firms to buy commodities speculatively, according to the report.

It cites familiar reasons:

Some producers took advantage of arbitrage opportunities presented by plummeting global commodity and shipping prices to replace domestic production with imported supply, illustrated by the steep drop in energy use in the first half of the year as energy-intensive miners and smelters shut down operations in favour of cheaper imports.

And again, rising prices and the fading effect of the stimulus are key reasons why this boom might be over.

Could we be about to see the reality of sluggish demand return to the markets? The CGES report also notes that Mexican and North Sea production were flat due to declines in Mexico and North Sea maintenance – the latter of course, being only temporary.

Related links:

Demand rebound: Everybody, calm down (FT Energy Source, 14/08/09)
Emerging markets’ monetary policy: the key to oil demand (FT Energy Source, 14/08/09)

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