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    MARKET EDGES

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The coverage of this morning’s balance of trade data has produced screaming negative headlines in the media. To be sure, the rapid decline in exports and even steeper import contraction creates a conundrum for world trade; there is real pain in the data, but there are also signs of resilience in China’s heavy industrial sector. Here is my quick read on the import portion of the equation:

IMPORTS:

With USD measured imports down 29% for the month and 43% year-over-year there is plenty of bad news to go around, as evidenced by the regional/national breakout (see table).

When considering this information as an indication of overall Chinese demand it is critical however to run the numbers.

REFLATION MATH:

Ultimately, tracking trade data in USD can partially mask the real underlying situation. As an example, considers the tonnage data for Iron ore imports in January (see table).

At 32.65 million metric tons, imports declined by only 5.4% for the month, with total tonnage remaining in excess of 30 million for every month since October 2007 (see chart below). Clearly imports of basic materials have declined, but the data for raw materials like ore suggest that purchasing agents and mill operators are still feeling demand while anticipating the impact of the stimulus programs for Q2.

There is no better illustration of Chinese appetite than yesterday’s news of a potential $20 billion investment into Rio Tinto by Chinalco, the largest Chinese aluminum producer. Yesterday we touched on some on other data points that continue to support our conviction in our Reflation/Chinese recovery themes for 2009: Coal imports, a minor but fascinating measure and the Baltic Dry sub index for Western Australia/China routes. These positives are underscored by today’s news.

We remain bullish on the waking Ox and its appetite for raw materials in the coming months. As always we will keep our eye focused on every data point as it arrives, continually testing our thesis.

Andrew Barber
Director