China's Commodity Crossroads: Trade Tensions and Soft Demand Cloud Q1 Outlook

The first quarter of 2025 offered a mixed reading on China’s economic health, with commodity imports reflecting both lingering domestic challenges and escalating trade tensions. Data from January to March revealed uneven demand trends across key sectors, while policy uncertainties and global price pressures cast a shadow over the outlook.

Crude Oil: Volatility and Restocking

China’s crude oil imports dipped to 83.85 million metric tons in January-February, a 3.4% year-on-year decline, as high global prices and refinery maintenance dampened purchases. Brent crude surged to a six-month high of $82.63/barrel in mid-January, deterring refiners. However, a late-February price drop to $69.52/barrel spurred a rebound in March, with imports hitting 10.14 million bpd—the highest in three months.

The March rebound suggests some normalization, but volumes remain below 2024 levels, underscoring weak underlying demand. Analysts caution that further price declines could rekindle buying, but trade tensions complicate the picture: U.S. tariffs on Chinese exports threaten to slow industrial activity further.

LNG and Iron Ore: Pricing Pressure and Policy Headwinds

LNG imports fell 8.1% year-on-year to 20.31 million tons as spot prices nearly doubled to a 15-month high of $16.10/MMBtu, driven by cold weather and tight global supply. Meanwhile, iron ore imports dropped 8.4% to 191.36 million tons, partly due to Australian cyclone disruptions and Beijing’s push to curb steel production in 2025.

Copper imports also weakened, falling 7.2% as prices rose 11% to $9,739/ton in early March. Rising input costs for manufacturers could further strain profit margins unless domestic demand accelerates.

Coal: Domestic Production Erodes Imports

Coal imports hit a record 76.12 million tons in January-February, but this marked a 29% drop from late 2024 levels as domestic production ramped up and power plants built inventories. The shift highlights Beijing’s efforts to reduce reliance on foreign energy amid trade disputes.

Trade Tensions: A Double-Edged Sword

The 10% U.S. tariff on Chinese goods, effective since February, is projected to shave 0.3 percentage points off China’s GDP growth. In retaliation, Beijing imposed tariffs on $14 billion of U.S. exports, including crude oil, LNG, and farm machinery. While tariffs may boost export competitiveness by weakening the yuan, they risk deepening global supply chain frictions.

The National People’s Congress (NPC) in March 2025 will set the annual GDP target, with a 4.5% growth goal requiring aggressive stimulus measures. However, policymakers face a dilemma: easing financial conditions could stoke inflation risks, while inaction risks exacerbating deflationary pressures.

The AI Dilemma: Chip Shortages and Growth Hurdles

China’s booming AI sector—led by firms like DeepSeek and Alibaba—faces a critical constraint: chip shortages. U.S. export curbs on advanced semiconductors have stymied computing power upgrades, a bottleneck for AI development.

Equity Outlook: Valuations vs. Risks

Russell Investments maintains a cautiously positive stance on Chinese equities, citing forward P/E ratios of 10x (historically undemanding) and projected 9% EPS growth in 2025 if GDP reaches 4.5%. However, risks loom:
- Deflation: Consumer prices remain near four-year lows, discouraging spending.
- Property Sector: Weak home sales and developer caution continue to drag on growth.
- Geopolitical Risks: Trade tensions could escalate if the U.S. expands tariffs post-April 1.

Conclusion: Navigating the Crossroads

China’s Q1 commodity data paints a picture of an economy navigating headwinds. While March’s crude rebound and record coal imports hint at resilience, the broader narrative remains one of caution. Trade tensions, deflation risks, and chip shortages pose significant hurdles.

Russell’s analysis suggests equities offer value, but investors must weigh these risks carefully. A 4.5% GDP target would require decisive policy action, including fiscal stimulus and yuan flexibility. Until then, commodity markets will remain hostage to trade negotiations and global price dynamics. For now, China’s path forward is as uncertain as its commodity imports.