China’s Commodity Buying Spree

Determining the percentage of each commodity being stockpiled is difficult, especially in China, where scant data are released. Assessing steel demand, in particular, has become a subject of almost obsessive interest among many shipping executives and economists as a barometer of emerging markets’ health and as an indicator of demand for things like iron ore and cars.

Sanjay Mehta, one of the four managing directors of Essar Global, the big Indian multinational in steel, shipping and other heavy industries, estimated that North American steel mills were operating at 50 to 60 percent of capacity, Chinese steel mills at 70 percent of capacity and Indian steel mills at 100 percent of capacity.

The resilience of the Indian economy is helping to sustain demand for commodities, he said. But he was cautious about the global economy. He suggested that part of China’s purchasing over the last several months represented an effort to rebuild inventories that were drawn down during the autumn and winter.

“It is not all related to consumption,” he said, predicting that prices would stay roughly at current levels through the middle of 2011. Prices of many commodities have jumped sharply in recent months — spot oil prices, in particular, have doubled since late December. That is driving up the price of gasoline and diesel in many countries.

Steel demand in China is already recovering for types of steel used in construction, Mr. Elman said. Local, provincial and national government agencies are ramping up investments quickly as part of economic stimulus programs.

But demand has been slower to rebound for higher grades of steel used in consumer products, despite $1 billion in Chinese government incentives for the purchase of cars and household appliances.

Some economists say they are bullish on commodities because they believe that the United States and European economies are on their way to recovery.

“The commodity price rally is for real,” said Ajay Kapur, the chief global strategist at Mirae Asset, a big Korean financial firm. “I’m not expecting any huge correction from here.”

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Other executives, particularly in shipping, are less optimistic, and see signs of a bubble in freight rates, and possibly commodities, that may repeat the sudden rise and fall of prices last year.

“The past two weeks have been nuts and, rather than cheering this sudden comeback of the dry bulk market, I do have a considerable amount of concern that we are seeing the same bubble again,” Kenneth Koo, the chairman and chief executive of the Tai Chong Cheang Steamship Company, another big Hong Kong shipping line, wrote in an e-mail message. “And like that past bubble, it’s not going to sustain.”

This story originally appeared in The New York Times

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