I have voiced caution in using commodity prices, especially copper, as leading economic indicator. With new data coming out of China, it looks like China has been strategically building up commodities inventory and a good part of Chinese recovery story as reflected by commodities prices may have gone a bit too far.

The below chart from BoFIT looks at China’s crude and iron ore imports, at a 3-month moving average, dating back to 2001. The recent sharp jump at both imports can’t even be justified during normal economic times, let alone we are in the deepest recession since WWII.

There is only one explanation: China is buying commodities on the cheap.

More analysis from BoFIT:

China’s appetite for commodities driven by desire to build up inventories. Although the volume of Chinese imports overall is still down 6 % from last year (and down 25 % in value terms), import volumes have rebounded sharply in recent months due largely to a massive increase in commodity imports. Crude oil import volumes now exceed last year’s level and iron ore imports are up about a third from last year (see chart). Imports of pure aluminium and copper have skyrocketed from previous years.

The growth in imports of metallic ores and refined metals has been driven in part from of a revival in construction activity as a result of the government’s stimulus package. Increased construction, in turn, has helped steelmakers recover from last year’s production collapse. Carmakers are also driving metal demand. In May, China produced about 600,000 passenger cars, a third more than in May 2008.

Higher output, however, does not fully explain the increase. Companies appear to be taking advantage of a slump in global commodity prices to replenish depleted raw material inventories; energy prices are about half of last year’s peak and metal prices are off 40 % from their recent highs. There is also evidence that certain commodities are cheaper abroad right now than in China. For example, China’s own iron ore production is still well below the level of a year ago.

China’s building up of strategic commodity reserves is affecting global demand for crude oil and metals. Its recent aggressive purchasing of pure aluminium and copper may be related to the build up.