Has China's Insatiable Demand Been Satiated?

10/05/11 -- Much has been made in recent years of China's so-called insatiable demand for commodities, especially soybeans. In the last twenty years Chinese soybean production has been relatively static at around 13-16 MMT, yet we've seen imports rise from less than a million tonnes a year back then to an estimated 57 MMT in 2010/11, according to the USDA.

Is this meteoric rise in imports really all down to a boom in demand backed up by a yearning for all things Westernised or could there be other factors also at play?

One interesting report from Dow Jones here suggests that other forces are indeed very much at play.

As credit becomes more difficult to obtain in China, some trading companies have resorted to generating funds by importing soybean cargoes that they neither need, or in some cases even use, simply because they can sell them as a cash commodity on the spot market.

A low interest, or even interest free, letter of credit issued against the soybean cargo doesn't need to be repaid for three to six months providing the importer with a short-terms cash injection.

Of course they probably end up selling the cash soybeans at below the cost of replacement, so there's rarely going to be enough money in the kitty to repay the letter of credit when it falls due, but hey they can simply import another one before then can't they?

It sounds like a Bernie Madoff inspired Ponzi scheme which will only come home to roost if and when the Chinese government decide to clamp down on the practice. That or when the kitty finally runs so dry that the companies involved can't import soybeans fast enough to meet their imminent payment obligations.

Either way it looks like a sizable pack of cards that could implode at any time, leaving behind it a large stockpile of soybeans sat on the quayside in China looking for a home.

How widespread is the practice? Possibly 30-40% of port stocks, which are perhaps tellingly at record levels, could be being used this way the report estimates.

It's a bit like say Taylor Wimpey suddenly becoming the UK's largest (and cheapest) supplier of soybeans.