A rather interesting news analysis article in today’s print edition of the Financial Times, penned by Leslie Hook in Beijing  (paid subscription or sign-up account required) makes the observation that China’s import demand for  key commodities has been rather quiet this year, suggesting that there is cutback underway.  The key question poised is whether this cutback will be longstanding. While copper, coal and various base metals are currently experiencing reduced demand, will this trend be longer-lasting?

The article points to analysts indicating that the drop is due to several factors including slower economic growth and a move to run down inventories. Supply Chain Matters concurs and in watching these China trends over the past two years, we have noted signs of speculative inventory hoarding in the past. FT notes that the current high global prices for most commodities make it less attractive for Chinese manufacturers to currently hold large stocks of raw materials.

The key question however is whether this pullback represents a temporary drawdown of existing raw material inventories or whether this is a longer-term trend impacting the state of overall global demand for commodities.  Is this a concerted effort to force commodity prices lower, only to create buying opportunities in the not too distant future?

We believe the key test will come at the end of 2011, after end-of-year and New Year holiday production volumes are completed and shipped to retail and other industrial customers.  China’s import activities tend to increase in the Q4 or Q1 time periods reflecting the influence of production cycles. We recommend that sourcing and procurement teams not get overly excited that a bend in the commodities speculation and demand curve is imminent, but rather that global dynamics continue to play out.

What about your view?  Long or short-term trend?

Bob Ferrari