What China’s stockpiles means for Aus resources

China’s strategic stockpiling of commodities is likely to protect demand for Australian resources going forward.

China is a pivotal export market for Australia, accounting for between 35 per cent and 40 per cent of the economy’s total exports. A slowing Chinese economy poses challenges for Australian exporters, but China’s moves to bolster its resources inventory is mitigating the drag.

China has often dabbled in stockpiling commodities but amid a sluggish economy, this time appears different. Commodity imports surged 16 per cent to 2.6 billion tonnes in 2023, and a further 5 per cent in the eight months to August 2024.

Forces

The power shortages of 2021-22 perhaps underlie China's commitment to energy security. Since then, China has invested in oil- and gas-storage capacity, toward an estimated capacity of up to 1.8 billion barrels of oil and 35 billion cubic metres of gas. Gas capacity could rise by a further 40 per cent over 2025.

Gas stockpiling reflects the push for cleaner fuels while ensuring energy security. Gas imports rose to 121 million tonnes in 2023, 46 per cent above their pre-pandemic average. Monthly gas imports are set to hit record high in 2024, with imports rising 13 per cent through August.

China’s coal imports are in the spotlight amid the global push for clean energy. Coal still forms 53 per cent of China’s energy mix, and lower prices may be prompting China to accumulate. Coal imports rose 60 per cent in 2023 and a further 12 per cent to August.

Similarly, China’s monthly oil imports are tracking above trend despite contracting underlying demand. Oil stocks have risen to 1.1 billion barrels, or 20 per cent of annual demand.

China’s aim to cement its economic position on the back of ‘new productive forces’ will support its metal demand. The economy seems to be stockpiling a host of metals to ensure an uninterrupted supply of critical resources for sectors including electric vehicles, renewables, 5G and advanced semiconductors.

Copper is a crucial metal to power China’s energy transition. Net copper imports have risen 4 per cent in the year to August 2024, against estimated underlying demand growth of 1.8 per cent. Inventories rose to 16 per cent of annual demand in 2023, against the pre-pandemic average of 12 per cent.

Smelting capacity has increased to 10.5 million tonnes with a massive addition of more than five million tonnes since 2013. This is another way to accumulate copper reserves. There are plans to further expand smelting capacity by 30 per cent by end of this decade, which will keep copper imports elevated on a net basis.

Nickel perhaps is the only exception among the metals. Imports have slowed in 2024 after rising over 20 per cent in 2023. But inventories are falling, and a replenishment is on the cards, given nickel’s primary use in electric vehicle and battery technology.

So far in 2024 China has imported 40 million more tonnes of iron ore than at the same point in 2023, but steel production has contracted 2.6 per cent. As iron ore stocks are merely 10 per cent of annual demand, China’s appetite for imports is likely to remain large.

The story is different for grains. China's domestic supply is falling short of domestic demand. The economy holds substantial inventories of corn, wheat, and rice, covering over 50 per cent of its demand. While imports are essential, China wields significant bargaining power as stockpiling becomes more advantageous when global prices are lower.

Trend

China’s efforts to stockpile commodities looks to be a trend and not an aberration. The strategic impetus to secure commodity reserves is motivated by China’s ambition for new economic sectors in a changing global landscape. Geopolitical shifts have complicated trading relationships, while its own economy will continue to demand resources.

Despite the recent strong accumulation of commodities, China’s inventories do not look excessive relative to storage capacities. Imports could therefore remain elevated, mitigating the downside to global commodity demand from its slowing economy.

With China expected to continue amassing commodity reserves, there is a silver lining for Australian exporters in 2025. For instance, despite contracting domestic steel production, China maintained its near 85 per cent share in Australia’s iron ore exports in fiscal 2023-24. In the same period, Australia’s coal import share increased to 30 per cent from 12 per cent in the previous year.

For natural gas, China’s share of Australia’s total exports rose close to 30 per cent in fiscal 2023-24 from 23 per cent in 2022-23, despite a fall in value of overall gas exports. Similarly, Australia’s copper export share grew to 25 per cent in fiscal 2023-24 from 20 per cent in 2022-23.

A downside protection for Australian exports can also come from a shift in its export mix. While a structural decline in demand for conventional resources like iron ore and coking coal will weigh on exports, the growing exportation of metals like lithium, copper and gas will mitigate the drag beyond 2025.

China’s shifting growth lanes will gradually affect global commodity demand, but ongoing stockpiling is likely to cushion the impact.

Soni Kumari is a Commodity Strategist at ANZ Research