QINGDAO, China, May 21 — When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.
At Qingdao port, home to one of China’s largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted “grains storage”, and almost to the street.
Further south, some bonded warehouses in Shanghai are using car parks to store swollen copper stockpiles — another unusual phenomenon that bodes ill for global metal prices and raises questions about China’s ability to sustain its economic growth as the rest of the world falters.
Commodity markets are used to seeing China’s inventories swell in the first quarter, when manufacturing slows down due to the Lunar New Year holidays, and then gradually decline during the second quarter when industrial activity picks up.
This year is different.
Copper stocks in Shanghai’s bonded storage, the biggest in China, are now double the 300,000 tonnes average of the past four years, and iron ore stocks are about a third more than their 74 million tonnes average.
China is the world’s biggest buyer of industrial metals, which are then manufactured for domestic use or exported to the rest of the world.
Several euro zone economies are in recession and there are serious fears about the solvency of several more. The United States, the world’s biggest economy, is sputtering along, with a recovery just out of reach.
Then there’s China itself, where the economy is still growing, but at a significantly slower pace. Economists keep predicting the slowdown will end soon, but it’s hard to see how when the rest of the world appears headed for the doldrums.
“New orders have slowed quite substantially from a year ago,” said a manager at a large copper tube factory who declined to be named as he was not authorised to speak to the media.
“With demand so weak, we’ve scaled back operations, shut one production line and reduced the number of shifts.”
The slowdown has hit hard some of the small and medium-sized manufacturers and traders who form the bulk of China’s metals business. Some steel traders have committed suicide and owners of faltering factories have skipped town to escape creditors, according to local media reports over the past year.
Last week, the world’s biggest miner, BHP Billiton, said it was putting on hold a plan centred on China to spend US$80 billion (RM250.4 billion) over the next five years to expand its iron ore, coal, energy and base metals divisions.
BHP chairman Jacques Nasser, in his most cautious comments yet, also said he expected commodity prices to cool further, and that investors had lost confidence in the global economy.
“We should pause, take a deep breath and wait and see where the pieces fall around the world,” he said.
Misreading the market
China’s imports of refined copper have surged over 70 per cent so far this year to 1.1 million tonnes, while demand from Chinese manufacturers was forecast to rise by up to 7 per cent. Meanwhile, iron ore shipments have risen 6 per cent, with traders reckoning that local demand growth is much lower.
Copper is used in housing and appliances and iron ore is the raw material for steel.
For copper, Chinese traders appeared to have misjudged the fundamentals and embarked on a massive shopping spree in November, expecting demand to rebound after the Lunar New Year.
But the buyers never materialised in bulk and China is now left with up to 1.4 million tonnes of copper, the most since 2009. In the past month, stocks have fallen 3.5 per cent, half the pace from the same period a year ago, according to data from the Shanghai Futures Exchange.
“The turnaround time for copper stocks used to be only one or two months, but now it’s averaging six months or more,” said Zhang, a manager at a bonded warehouse at Shanghai’s Yangshan port who would only give his surname.
“The destocking is happening very, very slowly.”
The glut has already prompted some companies to sell copper into London Metals Exchange warehouses, a move that would further depress the exchange’s benchmark prices.
Copper has also lost its lustre as a financing tool for investors who use the metal as collateral to borrow yuan in a punt on the Chinese currency and also to invest in the property sector, which has fizzled out.
Copper has already shed 9 per cent in the past two weeks to hit a four-month low of US$7,625. Many traders reckon it’s only a matter of time before prices test US$7,500 or lower, which could spark panic selling.
Iron ore has fared little better. Steel mills are digesting stocks at an average rate of 10 per cent this year compared to 20 per cent over the past five years, according to BoA Merrill Lynch. Prices are 8.3 per cent lower so far this quarter.
Steel futures are also down over 5 per cent this year, as mills produce at record levels even though demand is weak.
Some Chinese steel mills have postponed delivery of iron ore from miners, including top supplier Vale, as a slow steel market cuts demand and producers expect a further drop in prices, sources at mills and traders said.
Slowdown, not a collapse
While a slew of disappointing April economic data from China has added to the global gloom, there are so far few indications the Beijing authorities will allow the slowdown to turn into a hard landing, or for the economy to revisit the slump of 2008.
Industrial output rose 9.3 per cent in April, below the 12 per cent forecast and the weakest growth in three years, while retail sales also disappointed, expanding 14.1 per cent versus a forecast of 15.2 per cent.
Trade figures, and commodity imports, were also weaker.
Four years ago, however, the global financial crisis triggered by the collapse of Lehman Brothers broadsided the economy: factories shut down suddenly, millions of workers got laid off, ports ground to a halt. The situation only perked up after the government introduced a US$600 billion stimulus scheme.
This time around, orders are still coming in, there is a labour shortage in some industries and urban wage inflation remains a headache for employers.
Recent improvements in both the HSBC and the official Purchasing Managers’ Index also suggest the worst may be over for China’s vast factory sector.
The stationary cargo trains at Qingdao port, however, may be telling a different story. — Reuters