A Windfall for China as Commodity Prices Plunge

DALIAN, China – Lower prices for oil and other commodities are delivering China a windfall, as the world’s largest importer of natural resources stocks up and saves money in the process.

By some estimates, China is enjoying annual headline savings of as much as $250 billion from stepped-up purchases of discounted oil, copper and iron ore – much of it arriving aboard dented bulk carriers and greasy tankers at northeastern Dalian port and other trade gateways.

“China is the mega winner from the drop in industrial commodity prices,” said Kenneth Courtis, chairman of Starfort Holdings, an investment, private equity and commodity group. He estimates that China is saving over $600 million on its daily 12-million-barrel import bill, or over $200 billion a year, following the halving in oil prices since last summer.

Those savings are equivalent to the investment initiatives announced by the government to strengthen ties with neighbors by building trade and transport links: $50 billion for China’s Asian Infrastructure Investment Bank, $40 billion for the Silk Road infrastructure fund and $10 billion for the New Development Bank, which Beijing is co-founding with Brazil, Russia, India and South Africa, plus $41 billion for a related contingency fund.

China’s finance ministry said in a report released at the national legislature’s annual session ending Sunday that it planned to spend 154.6 billion yuan ($24.7 billion) this year building up its reserves of grains, edible oils and what it termed “other materials, ” a 33% rise over 2014 when stockpile-spending rose 22%.

The windfall comes on top of China’s steady trade surpluses and nearly $4 trillion in reserves, and makes it more affordable for Beijing to prop up beleaguered oil-producing partners like Russia and Venezuela.

“It is a mind-boggling number,” said Mr. Courtis, former vice chairman of Goldman Sachs Asia. “At that rate, the savings of the last fortnight cover the commitment for new investments in Latin America, including the bailout of Venezuela.”

China has long-term oil supply contracts with Venezuela and Russia, two countries that share its suspicion of U.S. policy, and hasn’t re-negotiated terms of delivery since prices tumbled, said American Enterprise Institute scholar Derek Scissors. In doing so, Beijing is betting that timely support will further its longer-term strategic interests and be remembered when prices recover.

 “For both suppliers, China has had good cause for months to demand new price points,” Mr. Scissors said. “But China has not renounced them, despite having many easier options.”

It has also extended loans to fiscally-strained oil producers Ecuador and Argentina, which in February approved a 50-year deal giving China its first overseas satellite tracking station.

Commerce Ministry spokesman Shen Danyang confirmed in a recent briefing that China is boosting commodity imports to take advantage of lower global prices. He said Beijing continues to support longstanding allies. If Russia is in need, “China will provide necessary assistance within its capabilities,” he said.

Amped-up purchases of oil are helping China add to its strategic petroleum reserve, taking it toward its goal of a 90-day supply by 2020, analysts say.

Imports of iron ore rose 14% last year over 2013 levels, while prices also plummeted, for a headline saving of around $30 billion.

For copper, China increased its purchases more than 7% last year, while London benchmark prices declined 20%. Some 300,000 to 500,000 tons of the copper purchased was stashed in its strategic reserve, said Frank Tang, analyst with investment bank North Square Blue Oak.

This isn’t the first time that China has bought on the cheap. When commodity prices fell after the 2009 financial crisis, the Chinese government stocked up on copper that it sold at a large profit two years later.

“They tend to buy massive amounts on the dips,” said commodity economist Thomas Pugh with Capital Economics. “Savings are substantial.”

On the downside, China’s appetite may slacken if global and domestic demand for manufactured goods doesn’t pick up. Cheaper commodity prices also could forestall much-needed structural reform by affording bloated steel and other heavy industry producers a reprieve, some economists argue.

Unlike other countries, China’s currency hasn’t significantly depreciated, so it gets more of the full benefit from buying less expensive commodities priced in U.S. dollars, Mr. Courtis said. “In a crisis, it’s always the one with money that does well,” he said. “China is sitting in the catbird seat and can name its conditions.”