Winter is looking a little weird for China’s commodities

The northern winter usually leads to a demand and price peak for several major commodities in Asia, but this year is bucking the trend for coal, liquefied natural gas (LNG) and iron ore.

There doesn’t appear to be one single driving narrative causing the break with the usual seasonal patterns, rather a variety of unrelated, or loosely related factors are at work, but with China as a common thread.

LNG provides the most stark example, with the spot Asian price actually weakening at a time when it is usually strengthening.

It dropped to $9.80 per mn British thermal units (mmBtu) in the week to November 30, the weakest since late July. Spot LNG has in the past few years exhibited a strong and reliable seasonal pattern in Asia, rising to a winter-peak before slackening into summer.

The peak so far in 2018 has been in summer, when LNG reached $11.60 per mmBtu in June, above the prior winterhigh of $11.50 from mid-January. LNG has been influenced by a variety of factors, with summer prices rising because of demand for cooling amid warmer-than-usual weather, and some supply issues, including an outage at Malaysia’s Bintalu project.

The winter price surge hasn’t happened largely because China, the world’s second-biggest LNG importer and a major driver of winter demand, is not experiencing the same demand surge as it did last year.

In 2017-18, Chinese demand for LNG soared as the country moved sharply to cut back on the use of coal for residential heating over winter amid efforts to mitigate air pollution. However, this winter China appears to have prepared more thoroughly, building up natural gas inventories and being more cautious in the amount of coal-to-gas switching being undertaken.

A milder-than-usual winter so far in North Asia has also limited demand for spot cargoes from major buyers such as Japan and South Korea.

In coal, the winter-peak experienced since the price recovery started in 2016 has been absent, in part because of the warmer weather, but also because of moves in China to restrict imports. The price of thermal coal at Australia’s Newcastle port, as assessed by Argus Media, was $97.94 a tonne in the week ended November 30. While this was up a touch from the seven-month low of $97.50 a tonne the prior week, it’s still well below the peak of $119.74 reached in mid-July. In common with LNG, China, the world’s biggest coal importer, appears to be playing a role in keeping the polluting fuel from enjoying a winterpeak.

Chinese trading companies said the authorities in Beijing have indicated that coal imports are to be wound back for December as part of efforts to keep imports for 2018 around the same level as 2017.

That will be difficult as imports for the first 10 months of 2018, at 252mn tonnes, were already within spitting distance of the total of 279mn for the whole of 2017. China’s coal utilities have plentiful inventories for winter amid rising domestic production and it’s believed the authorities are prioritising the consumption of local supplies. Iron ore is another commodity that usually enjoys a strong run in the northern winter, albeit usually toward the tail end as Chinese steel mills start to re-stock ahead of the summer peak demand for steel.

This year, iron ore peaked in late February, with the 62% grade, as assessed by Argus Media, reaching $79.90 a tonne on February 26. But the steelmaking ingredient may have already reached its winter-peak, having hit $77.80 on November 9, and subsequently dropping sharply to a low of $64.55 on November 27.

It has recovered somewhat since then to $66.45 a tonne on Monday, but that was most likely because commodities in general got a boost from news of the trade dispute ceasefire between US President Donald Trump and his Chinese counterpart Xi Jinping. Iron ore is declining in tandem with Chinese steel prices, which have been suffering because of a poorer demand outlook and still strong production. Whether iron ore can stage a late winter rally will likely be dependent on whether the market takes the view that China’s infrastructure and construction spending look positive for 2019. Overall it appears that without any deliberate policy moves, China has disrupted the normal season pattern for some of its major commodity imports.

This is perhaps an important reminder that the world’s biggest buyer of natural resources can make commodities dance to its tune, even without really trying.