Chinese Economic Picture Shows Improvement

Despite the ongoing trade war with the United States through November, Chinese economic fortunes improved during the month. Manufacturing PMI pushed to the highest level in 2019, finishing at 51.8% to remain within expansionary territory for a fourth straight month. Construction activity is also proving resilient with housing starts up 10% YTD against the same period a year earlier through October, reversing a trend of slowing growth in place since April.

Such positive manufacturing and construction output readings are a result, in part, of Chinese fiscal stimulus, albeit such figures are hard to pinpoint. Official NBS data had National Government expenditures higher nearly 16% y/y through both March and April of this year, aligning with announcements for increased governmental intervention made by the politburo. The state appears to have pushed another round of stimulus in September with spending up 13% against year earlier levels.

Iron Ore Demand Pushes Higher

The relationship between fiscal stimulus and a recent pickup across both the manufacturing and construction industries had a clear and positive impact on the demand for iron ore. After bottoming out at a decades low 71 Mt in April, iron ore arrivals managed to trend higher before peaking at 97 Mt through October, a new record high. November import levels slowed slightly (-3 Mt m/m), albeit arrivals still held well within the 85th percentile against the observation set back three years in time. Despite the upward trend in imports over the past half year, the weakness through early 2019 will make it difficult for Chinese iron ore arrivals to post growth y/y. YTD volumes are holding at 1,367 Mt, lower 148 Mt against the 2018 full year total.

Brazil has recently bore the brunt of the overall decline in Chinese demand for iron ore. Volumes from the Latin state ended down 2.32 Mt m/m to finish at 22.88 Mt (24.4% of total). Australia, China’s most important source of iron ore, fared better. The state realized a slight market share improvement (+1.8%) despite a small 0.50 Mt m/m decrease in arrivals. Nonetheless, total volumes from Australia finished at 47.4 Mt, the weakest level since April.

Chinese Oil Demand Sets Record

Chinese oil imports impressed in November, albeit it is unlikely demand for petroleum products pushed higher on the month. Seaborne oil arrivals managed a record high 10.03 mbpd, slightly edging out the previous record set in January of this year (10 mbpd). On the year, Chinese seaborne imports have managed 9.24 mbpd, far outpacing volumes through the same 11-month period of 2018 (8.26 mbpd).

Recent import strength is unsurprising. Chinese oil imports began to show signs of extreme positive seasonal bias last year when arrivals finished at a record 9.45 mbpd through the fourth quarter, up 1.63 mbpd against year earlier levels. December 2018 alone finished at the highest import volume all year (9.53 mbpd). Such a positive seasonal pattern appears to be playing a role yet again this year. Expect December arrivals to approach or surpass record levels.

Despite record-setting oil import volumes, demand for domestic petroleum products did not represent a driving factor in overall arrival strength. Instead, refineries appear to be holding runs at elevated levels before re-exporting product that exceeds domestic demand. Combined export loadings of middle distillates and light ends finished the month at a 2019 high 1.17 mbpd, marking a gain of 130 kbpd m/m. Again, such activity appears to be seasonal given December 2018 (1.25 mbpd) also represented the highest export month for that given year.

Loadings of diesel/gasoil (395 kbpd, +134 kbpd m/m) helped push much of the marginal m/m increase in petroleum product exports. Departures of gasoline (416 kbpd) held steady at elevated levels for a second straight month. Gasoline loadings have been especially notable in past months pushing higher 180 kbpd since November of last year, according to the 4-month moving average. This aligns with weak automobile sales, which have struggled to post y/y growth since June of last year. Chinese passenger traffic also remains in long-run contraction.

Elevated refinery runs weighed heavily on domestic inventories, which failed to reverse a multi-month trend of draws despite elevated oil import levels. Through the course of November, Chinese crude stocks finished lower 15 mb against end-October levels. Indeed, inventories have been in decline since early-July. Nonetheless, there are indicators of a trend reversal. Stocks managed a build of 10 mb through the first week of December in a clear sign of some re-stocking activity.

U.S. - Chinese Trade Negotiations Manage a Breakthrough

Despite rocky Phase 1 trade negotiations, progress has finally taken shape. On Friday, December 13th, Trump tweeted that “We (United States) have agreed to a very large Phase One Deal with China. They have agreed to many structural changes and massive purchases of Agricultural Product, Energy and Manufactured Goods, plus much more…the Penalty Tariffs set for December 15th will not be charged.” Trade Representative Lighthizer added further details – tariffs imposed in September on $120 bn worth of imports would be cut in half, but 25% tariffs implemented on $250 bn of Chinese arrivals earlier in the year will remain in place. The deal will come as a welcome sign to U.S. commodity producers. Chinese imports of U.S. LNG and LPG have held at near nil levels for months.

Chinese purchases of U.S. grains have gone against trend somewhat. Despite import duties of 25% implemented across a variety of U.S. agricultural products (July 2018), grain arrivals have enjoyed bouts of strength this year, namely in February/March/April (4.63 Mt) and again in September/August (3.12 Mt). Even November arrivals finished at a 2019 high 2.35 Mt, more than double the 1.18 Mtpm average on the year. The recent gain was driven by continued weakness in total volumes out of Brazil, resulting from negative seasonal bias.