Resource miners were in need of some good news. Falling commodity prices have dragged shares of big mining companies down almost a sixth this year. Hence the news yesterday of strong April trade numbers from the world’s largest importer of commodities buoyed mining stocks. Australia’s Whitehaven Coal rallied 7 per cent and Fortescue Metals 5 per cent after China said its imports had risen 17 per cent from a year ago, while exports were up 15 per cent.
But there are problems with the logic that improved Chinese trade data constitute a rebound in growth that allows miners to relax. First is the reliability of the data. Despite the buoyant export figures, those from China to the US and Europe – a third of the total – actually fell in April. As in March it was exports on China’s doorstep that remained strong. Barclays notes that exports to Hong Kong contributed 9 percentage points to the headline growth number in April, significantly up from 3 percentage points in 2011. The wide belief is that companies are over-invoicing exports to boost capital inflows and take advantage of the stronger renminbi.
The second problem is whether imports of commodities to China equate to underlying demand. Bernstein argues it was the lower iron ore prices of a decade ago that helped drive annual growth rates in Chinese steel production of 20 per cent. As iron ore prices rose, growth has fallen to just 6 per cent, even though steel capital stock is still only a third of the level of the US and Europe. What is more, copper imports surged 50 per cent in the first half of last year even though industrial production growth slowed to just 10 per cent. As lending markets remained tight, demand for commodities as collateral rose to secure loans. Investors should keep that in mind before using Chinese data to plunge into mining stocks.