Economists explain signs from China on raw material and commodities imports

RIO DE JANEIRO, BRAZIL – China’s imports increased 28.1% in July, below the 31.7% figure expected by economists.

On Monday, August 9, this news caused considerable volatility in the commodities market, as China is the world’s largest buyer of these products. Iron ore fell 4%, while crude oil retreated 3% at 3:26 PM (Brasília time).

According to Insper professor Roberto Dumas, it is important to understand that a commodities supercycle is not the same as an appreciation of all these products simultaneously or to the same extent.

Understanding China’s post-pandemic economic recovery is essential in order to outline the prospects for each of the low value-added products.

“The Chinese Communist Party made a war-like investment to keep the country from going into recession [last year]. When you have a dictatorship you can’t afford to have a recession, so there was a lot of money spent on infrastructure, something that boosted the price of ore. Now the situation is quite different; the pandemic is over in China,” he says.

Similarly, Ohmresearch commodities analyst Gilberto Cardoso says that one must be careful with the term “supercycle.” Cardoso recalls that China was the first country to enter and the first to emerge from the crisis triggered by Covid-19, so the Asian giant is expected to grow at lower levels henceforth, as a result of this recovery.

“I am not in favor of the term supercycle because we are still in the midst of a pandemic and the recovery leads us to pre-crisis levels. The increase in demand we are witnessing is punctual and varies in size and causes according to commodity,” he points out.

According to the Ohmresearch analyst, iron ore has ended its upward cycle that pushed the ton from US$88 to US$220 from March 2020 through July 2021.

The same situation would be happening with crude oil, which jumped from US$27 to US$76 a barrel in the same period, with the difference that the existence of a cartel such as the Organization of Petroleum Exporting Countries (OPEC) clouds the situation somewhat.

“Cartels regulate supply, so even if consumption stabilizes it could be that prices will rise due to a combination of reduced production. That’s why I don’t dare to price crude oil, I only understand that in the long term the fuel sector also undergoes transformations,” he points out, in reference to the increased use of renewable energy and the electric car boom.

If ore and oil are at the end of their cycles, the same cannot be said for other commodities. Roberto Dumas believes that copper is likely to appreciate in value, since it is the best metal to conduct electricity.

Gilberto Cardoso says that his long-term call for commodities would be to expand exposure to food, copper, lithium, and nickel, since the world will consume more food and electric vehicles and smartphones will need more batteries.

Dumas also believes that food should gain strength as China turns from an exporting to a consumer economy, something President Xi Jinping has been trying to achieve for years.

However, Bradesco BBI’s analyst Leandro Fontanesi disagrees with this assessment. He writes in a report that agricultural commodity prices have historically experienced appreciation cycles (such as the one occurring between 2019 and 2021) of 2 years on average, with an increase of approximately 20% per year in the value of each grain, while downturn cycles last, on average, 3 and a half years and prices drop around 10% per year.

“We expect a 30% decline in agricultural commodity prices by 2024, while Bloomberg estimates a 15% downturn,” Fontanesi points out.

The reasons for this projection are not merely statistical. The Bradesco BBI analyst believes it is likely that China will cut imports of agricultural products by 2022 after these purchases increased 50% in the past 2 years.

“This increase in imports occurred because China doubled the number of pigs in the last 2 years, after losing animals to the 2018 African swine fever, and needed to buy food to feed them. China’s pig population is relevant to global agriculture because pork is by far the country’s most important protein and China’s feed needs account for approximately 15% of global demand for wheat, corn and soy,” Fontanesi points out.

However, since June 2021, Chinese pork industry margins have turned negative with an oversupply and higher grain costs. “We estimate that corn prices in China (correlated with the U.S. and Brazil) must drop by 20% to 30% for margins to converge back to the historical average.”

Nevertheless, Dumas argues that this is an idiosyncrasy of the animal protein market, and it doesn’t change the fact that the government has again wanted to rebalance the economy toward consumption while the Delta variant of the coronavirus is spreading globally. “China needs to have food available should it need to go into lockdown,” he says.

In any event, the structural changes that the world is undergoing, and not only China, suggest that there are indeed different commodities in the market. Analysts such as Gilberto Cardoso note that not many Brazilian companies are exposed to these raw materials of the future.

Source: InfoMoney