China's reaction to tariffs paints a complicated picture. AP
China's reaction to tariffs paints a complicated picture. AP

China's apparent commodities resilience to US tariffs may be misleading



It's tempting to look at the relative resilience of China's imports of major commodities in September and conclude that the world's second-biggest economy is weathering the trade dispute with the United States quite well.

The problem with this view is that while the trade conflict certainly looms as an issue in China's commodity trade, it's not yet the driving factor and any strength, or weakness, in various imports is largely a result of different dynamics.

Take copper for example, where imports of unwrought metal in September were 521,000 tonnes, up 24 per cent from the 420,000 tonnes in August to the highest in two and a half years.

This looks like an extremely strong monthly gain, and would seem to be at odds with the narrative of a loss of momentum in the Chinese economy as trade war fears escalate. But the main driver of September's strong result is as a result of a crackdown on the use of copper scrap, part of government efforts to limit the importation of waste products.

This has forced China's smelters to turn to other sources of the industrial metal in order to satisfy demand.

There may be an element of the trade dispute with the administration of US President Donald Trump insofar as Beijing has imposed a 25 per cent import tax on scrap imports from the United States as part of its tit-for-tat tariffs measures.

But this would only eliminate a small amount of copper scrap from the overall Chinese market, meaning the trade war has yet to emerge as a major factor in the copper supply and demand story.

Iron ore was another commodity that appeared to have a relatively strong September, with imports gaining 4.6 per cent from the prior month to hit 93.5 million tonnes. Similar to copper, one would expect that iron ore would be vulnerable to trade tensions, given the use of steel in many of China's manufactured exports.

It appears that steel mills have been ramping up output ahead of pollution-related winter production curbs, which has in turn driven demand for iron ore.

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Read more:

While regional politics dominate the news, US-China tensions should be our biggest concern 

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Coal was one of the commodities to have a weaker September, with imports dropping 12 per cent from August to 24.1 million tonnes, but this was probably because of softer energy demand in the season between summer and winter peaks.

Crude oil imports improved a touch to their strongest level since May, reaching 9.05 million barrels per day (bpd) in September, up from 9.04 million bpd in August.

This marginal gain came as refinery runs rose and refiners also looked to build inventories ahead of winter.

One factor that doesn't gain as much attention as it should in analysis of China's commodity imports is price.

While price isn't the most important factor, it does often help explain some of the monthly movements in commodity imports.

Copper imports may have been boosted by the fact that at the time when cargoes for September arrivals were being arranged, London prices were weak, with the close of $5,801 a tonne on August 15 marking the low point for the year so far.

Similarly, benchmark 62-per cent iron ore, as assessed by Argus Media, was also soft in August, falling steadily from a peak early in the month, before starting to recover again in the last couple of days.

In contrast, benchmark Australian thermal coal prices at Newcastle port were close to year highs in the late July and August period, when cargoes for September were being booked.

Prices rose to the highest in more than six years in late July and remained elevated through August, potentially crimping demand for imports of the polluting fuel. With prices having dropped recently, slipping to $100.51 a tonne in the week ended October 12, it's possible that coal imports may increase in coming months.

Overall, China's commodity imports are still being driven by factors other than the trade dispute, but this remains a potential game-changer in the months ahead.

The problem is that it's unlikely to have the same impact across the commodity spectrum, as some imports may actually gain, especially if the government takes steps to boost infrastructure spending in order to shore up economic growth.

How tumultuous protests grew
  • A fuel tax protest by French drivers appealed to wider anti-government sentiment
  • Unlike previous French demonstrations there was no trade union or organised movement involved 
  • Demonstrators responded to online petitions and flooded squares to block traffic
  • At its height there were almost 300,000 on the streets in support
  • Named after the high visibility jackets that drivers must keep in cars 
  • Clashes soon turned violent as thousands fought with police at cordons
  • An estimated two dozen people lost eyes and many others were admitted to hospital 
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Mercer, the investment consulting arm of US services company Marsh & McLennan, expects its wealth division to at least double its assets under management (AUM) in the Middle East as wealth in the region continues to grow despite economic headwinds, a company official said.

Mercer Wealth, which globally has $160 billion in AUM, plans to boost its AUM in the region to $2-$3bn in the next 2-3 years from the present $1bn, said Yasir AbuShaban, a Dubai-based principal with Mercer Wealth.

Within the next two to three years, we are looking at reaching $2 to $3 billion as a conservative estimate and we do see an opportunity to do so,” said Mr AbuShaban.

Mercer does not directly make investments, but allocates clients’ money they have discretion to, to professional asset managers. They also provide advice to clients.

“We have buying power. We can negotiate on their (client’s) behalf with asset managers to provide them lower fees than they otherwise would have to get on their own,” he added.

Mercer Wealth’s clients include sovereign wealth funds, family offices, and insurance companies among others.

From its office in Dubai, Mercer also looks after Africa, India and Turkey, where they also see opportunity for growth.

Wealth creation in Middle East and Africa (MEA) grew 8.5 per cent to $8.1 trillion last year from $7.5tn in 2015, higher than last year’s global average of 6 per cent and the second-highest growth in a region after Asia-Pacific which grew 9.9 per cent, according to consultancy Boston Consulting Group (BCG). In the region, where wealth grew just 1.9 per cent in 2015 compared with 2014, a pickup in oil prices has helped in wealth generation.

BCG is forecasting MEA wealth will rise to $12tn by 2021, growing at an annual average of 8 per cent.

Drivers of wealth generation in the region will be split evenly between new wealth creation and growth of performance of existing assets, according to BCG.

Another general trend in the region is clients’ looking for a comprehensive approach to investing, according to Mr AbuShaban.

“Institutional investors or some of the families are seeing a slowdown in the available capital they have to invest and in that sense they are looking at optimizing the way they manage their portfolios and making sure they are not investing haphazardly and different parts of their investment are working together,” said Mr AbuShaban.

Some clients also have a higher appetite for risk, given the low interest-rate environment that does not provide enough yield for some institutional investors. These clients are keen to invest in illiquid assets, such as private equity and infrastructure.

“What we have seen is a desire for higher returns in what has been a low-return environment specifically in various fixed income or bonds,” he said.

“In this environment, we have seen a de facto increase in the risk that clients are taking in things like illiquid investments, private equity investments, infrastructure and private debt, those kind of investments were higher illiquidity results in incrementally higher returns.”

The Abu Dhabi Investment Authority, one of the largest sovereign wealth funds, said in its 2016 report that has gradually increased its exposure in direct private equity and private credit transactions, mainly in Asian markets and especially in China and India. The authority’s private equity department focused on structured equities owing to “their defensive characteristics.”

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