China has been the biggest driver of commodity markets for the past decade. But that's changing. Shrinking manufacturing activity in March signals slower demand for resources. Strong imports have heightened the risk of overstocking in precious metals. Lower demand from China may bring a welcome relief to other buyers.
HSBC's purchasing managers index for China shrank in March for a fifth successive month. Export orders failed to recover, and total new orders sank to a four-month low. New hiring also slumped. Yet despite the weak outlook, China's stockpiles of commodities are still rising: Almost 50 per cent of the respondents saw their raw materials' inventory rise in the last month, versus 47 per cent in February. Companies may have overstocked after refined copper imports jumped 170 per cent in February year-on-year. This leaves little scope for future demand increases.
The slowdown is not just a short-term blip. China's steel production in the last 10 years has grown 14 per cent a year, or about four percentage points above GDP growth. That will slow as the country reduces reliance on infrastructure investment and focuses more on domestic consumption. A slump in the property market could speed the transition. This means China will struggle to repeat its 11 per cent increase in iron ore imports in 2011. BHP Billiton, the world's biggest miner, expects growth to drop to single digits in 2012.
Meanwhile, China is becoming less thirsty for foreign oil. The country became the world's second-largest net importer of oil behind the United States in 2009. But recent domestic fuel price hikes have pushed prices closer to global levels, discouraging energy-intensive industries. Moreover, China is also making a big push into shale gas. State energy firms have struck shale deals in the United States to gain access to drilling technology, and started to bring in foreign partners for domestic production. A breakthrough in shale gas discovery at home would further curb appetite for imported oil.
Cooling Chinese demand will help reduce costs for foreign manufacturers, and will make gas prices less burdensome for consumers outside China. In the short term, China's commodities destocking will dominate. But the shift away from heavy industry, and exploitation of cheap domestic shale gas, means the trend should continue in the longer run.