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A worker loads steel bars at an iron and steel market in Wuhan, Hubei province. (STRINGER SHANGHAI/STRINGER SHANGHAI/REUTERS)
A worker loads steel bars at an iron and steel market in Wuhan, Hubei province. (STRINGER SHANGHAI/STRINGER SHANGHAI/REUTERS)

As China hoards, concern grows about recovery Add to ...

For weeks, the ships have been lining up 10 deep at China's booming Qingdao Port, waiting to unload their cargo into storage facilities that cannot keep pace with the thousands of tons of raw materials coming in.

With imports of iron ore, crude oil and other raw materials spiking - and reports of 90 ships at a time waiting their turn to unload - China's continuing growth, fuelled in part by aggressive government spending, has been keeping world commodity prices afloat.

As the global economy continues to falter and Chinese exports plummet, there is growing concern that the stockpiling may soon come to a halt, leading to further, painful drops in commodity prices.

"The level of [iron ore]importing doesn't match the level of steel production so far this year, so there's a considerable amount of stockpiling going on," said Tim Huxley, chief executive of Hong Kong-based Wah Kwong Maritime Transport Holdings, who along with many others in the shipping industry is grateful for what he called "a shot in the arm" but skeptical that the stockpiling can continue - especially since many of those container ships are sent away empty, without export orders to fill them.

At the same time, China is also stockpiling raw materials used in industrial production rather than exporting them, according to complaints lodged with the World Trade Organization by the U.S. and the European Union on Tuesday. They allege that China is using illegal duties and fees to crimp exports, giving its manufacturers an unfair advantage.

Both the stockpiling of imported commodities and the hoarding that is alleged in the WTO complaint could be inflating global prices for resources.

The risk is that if China's appetite for metals and oil begins to fade as restocking concludes and the rest of the world's demand for goods produced by the Asian economic superpower remains weak, any recovery in commodities could be at risk, undermining the broader recovery. Canada's commodity producers could be in for another bout of serious pain.

China's buying has largely offset the plunge in base metals demand from Europe and North America. Despite Chinese demand, however, global copper consumption contracted by almost 15 per cent in the first quarter, and is projected to be down about 14 per cent in second quarter.

"I question whether we are actually yet seeing a pickup in underlying consumption in China," David Wilson, the London-based director of metals research at Société Générale SA, said in an interview Tuesday in Toronto. "China has been the one bright spot this year. If there is a risk, it is that we are attaching too much reliance to China being able to drive a pickup in the rest of the world. China is just looking after China," he added.

Chinese demand for raw materials has been twofold. First, though most actual figures are kept secret, the Chinese government has been openly buying up commodities including crude oil, copper and iron ore for months, in what many analysts believe is a way to diversify its sovereign wealth beyond risky U.S. dollar investments. And second, state-owned enterprises and private firms have taken advantage of lower prices to restock supplies that dwindled during last year's record prices, in anticipation of increased demand for new roads, railways and high-rise buildings, as well as continued factory production promised by their government's four trillion yuan ($668-billion) stimulus package, issued last fall.

China's demand has helped keep many Canadian mining firms above water during the global recession. Citing strong sales to China, Teck Resources Ltd., Canada's largest base metals miner, recently said its 2009 coal production will be at the upper end of its forecast.

"China is buying our coal and they are telling us the want to buy more in the future," Teck spokesman Greg Waller said in an interview.

But warning signs of slowdown are emerging. Earlier this month, a senior official in China's National Energy Administration warned crude oil purchases for the country's strategic reserves would halt until it can build new storage facilities. A report from Stratfor Global Intelligence suggests Beijing may be testing out its global influence with this move. "Beijing is interested in having a strategic cache of oil to resort to in case of a crisis scenario, such as a disruption in supply from the Middle East or Africa. But it is also interested in gaining the ability to use its weight in commodity markets to affect global prices, perhaps to attempt to mitigate the negative domestic effects that could result from soaring oil prices like those seen in early 2008," the report states.

World Bank figures last week also showed that while import volumes of raw materials increased sharply in the last quarter, Chinese imports over all are dropping and exports are falling even faster. Government spending will drive most of China's expected 7.2 per cent GDP growth this year, and that stimulus money is expected to run out by early 2010.

"Clearly the government stimulus is very helpful to the economy at the moment, but there is a limit to how much and how long China's economy can diverge from the global economy," said Louis Kuijs, a senior economist in the World Bank's Beijing office. He noted that China has already felt much of the impact of government spending this year, and warned that exports are not expected to pick up significantly next year. The result is likely a short-term correction as early as this summer, with greater uncertainty over what next year will bring.

"China is probably the world's biggest purchaser of these products so when demand slides back substantially, it's going to put pressure on prices," said Wang Yijiang, a professor of economics at Beijing's Cheung Kong Graduate School of Business.

The concern is significant enough that Moody's Investor Service recently downgraded its outlook for the base metals, mining and steel industries in the Asia-Pacific region, putting them on par with the rest of the worldafter months in which they seemed to escape the malaise.

However, there is still faith that a combination of Chinese government policy and the country's still-growing economy will prevent a major collapse in prices before the global economy recovers.

"We're expecting a reasonable downturn in commodities prices over the next few months. … How large? That's fairly hard to tell," said Nick Chamie, head of emerging markets at RBC Dominion Securities Inc. in Toronto, who said the Chinese government still has the ability to issue further stimulus if needed."They certainly have the resources and capability to do so and they seem quite willing to do so. … We're not too concerned whether when the stimulus package wears off there will be a hiccup. We think the wherewithal is there to control the situation if need be."

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