China’s Demand for Commodities Plummets as Buyers Default

I have been repeatedly cautioning that developments in China, which the financial markets and media seem to be ignoring, could pose as the today’s black swan (low probability, high impact) event

From Reuters:

Chinese buyers are deferring or have defaulted on coal and iron ore deliveries following a drop in prices, traders said, providing more evidence that a slowdown in the world's second-largest economy is hitting its appetite for commodities.

China is the world's biggest consumer of iron ore, coal and other base metals, but recent data has shown the economy cooling more quickly than expected, with industrial output growth slowing sharply in April and fixed asset investment, a key driver of the economy, hitting its lowest in nearly a decade.

Coal and iron ore prices could fall further before recovering towards the tail end of the second quarter, traders say, sparking more defaults or deferred deliveries.

"There are a few distressed cargoes but no one is gung-ho enough to take them. Chinese utilities aren't buying because they have a lot of coal and traders are also afraid of getting burnt. It's very bearish now," said a trader.

The defaults come on the heels of a slump in global thermal coal benchmark prices to two-year lows and increases the prospect of an even steeper fall unless China revives buying to absorb the global coal surplus as exporters ramp up production.

True, China’s equity markets over the past two days have markedly rebounded, which media attributes to pledges by Premier Wen Jiabao for a pro-growth policy (read: stimulus) but it would seem that the recent bounce may likely signify the typical oversold bounce rather than a key reversal.

China’s Shanghai index has also mirrored actions in the world equity markets. And like the Western peers, Chinese investors seem to be addicted to ‘stimulus’ and are behaving much like the classical conditioning experiment popularly known as Pavlov’s Dogs

The above account only gives additional empirical evidence of China’s steepening economic decline, although it has not yet been established if this accounts for a cyclical slowdown or signs of a deflating bubble.

While the Chinese government is expected to intervene, we need to know exactly the measures they will undertake and how the markets respond to them. And for this reason, current conditions warrant a wait and see.