Market Minute: China’s Commodity Activity Showing Bright Signs

The headlines overnight continue to focus on China’s “weak” economic data, as China’s retail sales growth came in at 3.0% year-over-year, missing the Street’s expectations of 4.6%. This underperformance is unsurprising, given the persistent weakness in consumer spending and consumption activity. Discussions of economic stimulus without tangible results have understandably concerned some traders. However, it’s important to remember that stimulus takes time to permeate an economy. 

In the United States, for example, we are still feeling the effects of fiscal spending during and after COVID-19, one of the significant drivers of the current inflationary pressures. For China, the anticipated economic expansion may be a 2025 story. While current economic data may not reflect it, there are promising signs in various key leading indicators, particularly in the commodity markets. 

Key input goods like commodities—especially critical for a manufacturing-based economy like China—typically serve as leading indicators of upcoming economic growth. One data point often overlooked is China’s industrial production numbers, which met expectations at 5.4% year-over-year, a slight increase from the previous month’s reading. This uptick is encouraging for those bullish on China’s recovery. But there is more to consider: 

• Crude Oil: November crude output increased by 0.2% year-over-year to 14.24 million barrels per day, marking the first such increase since April. Recovering domestic oil demand, as opposed to export-driven demand, suggests we may be nearing the bottom for industrial activity. Domestic crude oil production also rose by 0.2% in November to 17.25 million metric tons, with year-to-date production up 1.9% year-over-year. After reducing refinery capacity in November to align output with demand, China appears to have achieved its goal. Tightening supply combined with a slight uptick in demand is stabilizing prices and creating a synthetic demand environment, which could lead to higher inflation—a desired outcome for China at the moment. 

• Coal: Coal production reached a record high in November, with daily averages of 14.2 million tons. Coal remains a vital energy source for China as it balances liquefied natural gas and coal imports, depending on cost and efficiency. Although China has expressed a long-term goal of moving away from coal, achieving this transition will take time. 

• Copper: Shanghai copper warehouse inventory, a critical indicator of copper demand and China’s need to replenish inventory, has continued to decline, with inventory levels down approximately 75% from their June highs. This trend highlights growing demand for this essential industrial metal. 

In the coming months, it will be crucial to monitor commodity data from China rather than consumer data. Rising demand for raw input goods like oil, copper, or soybeans indicates an uptick in consumption and industrial activity. The China trade has been challenging in 2024, and 2025 will likely present continued headwinds, including tariff policies and real estate market stabilization. However, optimistic signs in the commodity space suggest that the country may be nearing the bottom of its economic cycle.