Spring is just around the corner, and that means it’s time for the annual meeting of the National People’s Congress in China.
This year’s meeting was of particular note because the government signaled very strongly that its economy faces stiff headwinds. China’s premier, Li Keqiang, set an economic growth target of 7%. That’s the lowest since 1999, and many observers believe the country will be hard pressed to hit even that target.
On the face of it, that spells bad news for commodities.
As China slows down its infrastructure buildout and cuts back on polluting industries, demand for commodities such as iron ore and coal will drop.
For example, both the National Development and Reform Commission and Premier Li stated that coal usage would be cut in “key areas,” which likely means in and around big cities.
But, there’s also some good news for certain commodities…
Stockpile Build to Continue
You see, even though the country is planning to cut down on some of its commodities, it’s planning to stockpile others.
The Ministry of Finance announced that it would spend $24.7 billion this year to build up its stockpiles of grains, edible oil, and so-called “other materials”.
That’s a 33% rise in spending to build up reserves from 2014 levels, which in turn was up 22% from 2013 spending levels.
Last year, China took advantage of ultra-low prices for many commodities and imported record amounts of oil, copper, and other necessities.
Keep in mind, too, that the $24.7-billion figure is central government spending only. That doesn’t include what regional governments or private companies may spend.
Agriculture is another area that’s of interest to China. In a speech made to Congress, Li said that “the foundation of agriculture is weak.”
In particular, Li may be talking about soybeans. China’s output this year is forecasted to fall to a 23-year low of only 11.7 million metric tons. The country is already the world’s biggest importer of soybeans, accounting for 60% of the world’s volume.
And the country is no fool. It realizes, too, that the price of corn and wheat have fallen by more than half from the prices seen in 2012.
Also, for the first time ever, the government is permitting private companies to become involved in its expansion of grain storage facilities nationwide.
It’s thought that the storage capacity will be added in the storage-starved northeastern provinces of Jilin, Liaoning, and Heilongjiang, as well as Inner Mongolia.
Oil and Copper, Too
What about those “other materials”? These are believed to consist of mainly oil and copper.
As I’ve detailed before, China has a stated goal of building up its oil reserves to at least a 90-day supply. That’s similar to what many other nations around the world have.
The country imports about 60% of the oil it uses. So it’s buying oil now, at a 50% discount from just a few short months ago, and will continue to do so in 2015.
Copper is also on China’s shopping list, which is still near five-year lows. China imports roughly 70% of the copper it uses.
The metal is necessary for the government’s planned buildout of the electric grid infrastructure.
Last year, China’s Strategic Reserve Bureau was rumored to be a big buyer of copper during any large dips in price – a possible factor behind the record imports of copper.
Bottom line for commodities investors: Even though China’s economic growth engine is slowing, it’s still spending heavily on the commodities it needs the most – oil, copper, and food.
That should lend support to weak prices and put a floor under these commodities.
And the chase continues,