China July commodities imports stay high; outlook weakens

SHANGHAI (Reuters) - China's imports of key commodities, such as iron ore and copper, defied expectations for a monthly fall to stay high in July, but weak trade figures and a nine-month low in crude oil imports painted a picture of a slowing economy.

China is the world's second-largest oil consumer and the top buyer of iron ore, coal and several industrial metals, with investors and miners around the world relying on its appetite to prop up commodities prices hit by sluggish demand from the United States and Europe.

Analysts said an unexpected monthly rise of 6 percent in copper imports in July and a slight 0.8 percent fall in shipments of iron ore belied broader signs that China's economy was slowing swiftly, as it confronts slowing demand from its top trade partners, the European Union and the United States.

"I would not link an increase in Chinese copper imports to domestic demand because I don't see demand improving from here, it's actually very soft," said Judy Zhu, a commodities analyst at Standard Chartered Bank in Shanghai.

"A lot of imports are under term contracts so they have to import anyway, and this could result in bonded stockpiles rising."

Tumbling July spot prices of steel, iron ore and coal, which are leading indicators of industrial activity, underscored that China's demand for commodities had weakened further in the third quarter, raising doubts about whether growth is bottoming out.

"I expect to see bigger declines in imports in August and September. We've already seen production cuts among steel companies and even the larger ones have also scaled back output," said Helen Lau, a senior analyst with broking house UOB-Kay Hian.

"More importantly, there are no signs of improvement in steel demand, so steel mills will probably keep inventory of iron ore low."

Data on Friday also showed China's exports in July rose by just 1 percent from a year ago, undershooting forecasts by a big margin, to register the weakest growth since January. Shipments to the European Union dropped more than 16 percent.

China would face a challenge in meeting its target of 10 percent growth in trade in the second half of the year, Vice Commerce Minister Gao Hucheng had told reporters ahead of the data.

China's implied oil demand stood at its second-lowest this year, despite an annual rise of 0.9 percent to 9.15 million barrels per day, while average daily imports fell 3 percent from a month ago to hit a nine-month low.

Copper imports in July were 366,548 metric tons (404,050 tons), while those of iron ore dipped to 57.87 million tonnes. Soy imports rose to a 25-month high of 5.87 million tonnes, up 4.4 percent on the month.

CHANCE OF MORE EASING

The downbeat monthly data has boosted expectations for more policy easing by Beijing to shore up economic growth, which has slid since the beginning of 2011 to reach 7.6 percent in the second quarter, its weakest since the global financial crisis.

Beijing must act swiftly if its economy and commodities demand are to rebound in the second half, analysts said.

"The timing of this will be critical. A deeper slowdown and policy lags might delay the turning point and resultant recovery expected in the second half," Lachlan Shaw, commodities analyst the Commonwealth Bank of Australia, told clients in a note.

"The net impact on commodity prices will depend on whether new stimulus is timely enough to distract from a demand 'pothole' extending in the second half."

Analysts expect Beijing to cut interest rates in the third quarter and order two more cuts in the amount banks are required to hold as reserves by the end of the year.

Still, analysts said, any economic improvement will be fragile as the euro zone debt crisis and a sluggish U.S. recovery hold down global growth, the key factor that pushed China's new export orders in July to their steepest fall in eight months.

(Additional reporting by China/Singapore/Australia C&E team; Editing by Clarence Fernandez)