China’s V-shaped economic recovery and heavy infrastructure investment have helped fuel its appetite for raw commodities

Eyes have recently been focused on the result of the US presidential election and what that will mean for the global economy, but it is China that is leading the way in terms of recovery and the country continues to be the main driver for trade this year

CHINA’S appetite for imported commodities has been one of the bright spots for shipping during the pandemic, when demand in other economies has waned due to lockdown and travel restrictions.

The Asian country is not only expected to claim a larger share of the global economy in 2020 but is also actively expanding its global influence in trade and other affairs.

The International Monetary Fund revised its forecasts for gross domestic product in its latest October World Economic Outlook report, predicting the impact of the pandemic will be less severe on the world economy than in the June update as second-quarter GDP outturns were not as negative as previously feared.

China returned to growth and the sizable fiscal, monetary and regulatory responses from governments maintained disposable incomes, protected cash flow for companies and supported credit provision. Chinese GDP grew by 4.9% in the third quarter from a year earlier, according to official statistics.

This is in stark contrast to developments in many other countries, though.

IMF managing director Kristalina Georgieva warned that low- and middle-income countries could send global debt levels above 100% of global GDP next year; a development that could take decades to reverse.

According to the IMF, the period ahead will require balanced domestic policies that manage the trade-off between lifting near-term activity and addressing medium-term challenges. It recommends that policy makers simultaneously aim to mitigate climate change at the same time as bolstering the recovery from the pandemic.

Inflation has also dropped markedly this year in most economies bar China and the IMF expects full-year inflation to remain low compared to previous years.

However, inflation has been on a declining path since 2018 in many countries, again with China as an exception. Most commodity prices took a fall in the first half of this year, but as economies have started to recover, prices have followed suit.

Infrastructure spending

China has initiated a huge stimulus package that focuses on bolstering domestic infrastructure and this has seen purchases of key commodities rise.

After taking advantage of low prices for crude oil earlier in the year, it has not let up and the country imported a record volume from the US in September, reflected in increased tonne-mile demand for tankers from Gulf ports.

It was also revealed recently that Eastern Pacific, the Singapore-based shipmanagement company, will build and operate four 98,000 cu m very large ethane carriers for a Chinese petrochemical company that is about to start shipping regular cargoes of the refrigerated gas from the US Gulf.

The 15-year deal with Zhejiang Satellite Petrochemical underscores China’s rising dominance in US ethane export trades.

Analysts are also increasingly confident about prospects for the dry bulk market as China’s appetite for raw material rise.

China is in the process of its multi-facet “rebalancing,” from export- and investment-led growth to more consumption-driven growth, and is expected to have “a smooth handover” from publicly generated growth to private demand-driven growth beyond the near term, according to the IMF.

China’s growth is having a positive spillover effect on commodity prices, in turn providing encouragement to dry bulk freight rates.

The country’s iron ore production has been in decline since 2018 and shipping has benefited from that. In a normal year, more than 70% of iron ore shipments are destined for China but large ore carrier arrivals in China from Australia and Brazil, the main exporters, are up almost 2% for the year to date compared with 2019.

China is also a leading importer of coal, which is used for power generation and steel production. The majority of coal imports are sourced from Indonesia and Australia. Here we see a shift, though, since coal ship arrivals in China from Australia are up compared to last year, but they are down from Indonesia.

The concern here, however, is the rising political tension between China and its Antipodean neighbour, with the souring relations resulting in a ban on coal imports from Australia with the potential for other products to follow suit.

Looking at global steel production, we see that total volumes are still below last year, but China has the highest monthly production on record with 96m tonnes in August and the year-to-date volume is 4% above 2019.

This has led to a plateauing of the country’s iron ore imports recently but that could be short-lived as China has mandated greater use of scrap steel and stricter pollution controls in its next five-year economic plan.

China has been a heavy buyer of soyabeans this year to boost domestic reserves. In the first seven weeks of the US marketing year, soyabean exports to China amounted to 8.2m tonnes, according to BIMCO. That represents 72% of all US soyabean exports over the period.

China-US relations

As for exports, container freight rates on the Shanghai Containerised Freight Index have been at near-record highs due to the strong bounceback in consumer demand from the US and Europe following pandemic-led lockdowns there.

This is likely as a result of those economies prioritising the protection of personal income via furlough schemes and other measures, as opposed to China’s infrastructure-led spending.

However, with new lockdowns in Europe and uncertainty in the U.S. over its Covid-19 response in the wake of the election, some analysts have warned that there is no guarantee the current level of demand will be maintained beyond the short term, should consumer behaviour change.

The chief effect of Mr Biden’s approach on tariffs and sanctions will likely be calmer seas ahead, while that of Mr Trump will be for the maritime industry to batten down the hatches for another four years

At the time of publication, there was no clear winner in the US presidential election but whoever is eventually elected, it is unlikely that either Donald Trump or Joe Biden will lift the recent high tariffs imposed on certain Chinese goods, or oversee a dramatic cooling of the trade tensions between the two countries.

Meanwhile, China continues to expand its political influence on world affairs and is stepping up its importance in the developing world.

It has joined the World Health Organisation’s coronavirus programme, Covax, which aims to help poor and middle-income countries gain access to a coronavirus vaccine when available. This could be seen as a response to the US withdrawing its funding from the WHO.

The long-term Belt and Road Initiative also continues to increase China’s connectivity not only with its neighbouring countries, but also all the way to Europe via both land and sea.