LONDON: The first snapshot of China’s copper imports last month offered few surprises.
The aggregate figure of 351,000 tons for imports of refined metal, alloy, anode and products was up a bit on the previous month but down 15 percent on January 2011.
Barring any dramatic change in ratio split between December and January, imports of refined metal should have followed the same pattern.
January is always a tricky month from which to extrapolate a trend because of the moveable feast that is the Chinese Lunar New Year. Most analysts will wait for the February figures to smooth out any seasonal distortion before drawing too many conclusions.
But it’s fair to say that the January snapshot was pretty much in line with what the market is expecting over the short term from the world’s largest consumer, namely a slowing in refined metal imports from last year’s elevated levels offset by accelerated import flows of raw materials.
But might China yet spring a surprise in terms of how much refined copper it takes from the rest of the world this year?
The current consensus thinking that refined imports will drop this year is eminently logical.
China’s copper imports boomed last year even while the country’s economic growth was slowing to the point that a “hard landing” became a very real danger.
The combination resulted in a substantial build in copper stocks in Shanghai’s bonded warehouse zone.
Out of total refined copper imports of 3.4 million maybe as much as 600,000-700,000 tons went into such inventory, partly reflecting reduced appetite from mainland copper fabricators and partly reflecting increased appetite from financiers looking to use copper as loan collateral. This mountainous stockpile looms large in any calculation of what China might import over the next 12 months.
Has it, for example, caused Chinese fabricators to reduce the amount of metal they buy on full-year term contracts?
They might certainly have been tempted, given the wide gap between full-year producer premiums of around $ 100 per ton and the $40-50 per ton currently being quoted for Shanghai stocked metal.
At the moment the evidence is purely anecdotal and it will take a few more months’ data to try and work out the level of “must-have” copper flowing into the country this year.
At the very least spot fabricator demand for fresh imports can be expected to run at low levels over the coming period since mainland buyers will turn first to that Shanghai stockpile for top-up metal before committing to the import market.
Assessing the likely strength of financing demand is much trickier but well-flagged moves by some banks to tighten up credit for such imports imply that copper collateral flows are unlikely to see much further growth on 2012 levels. This combination of flat (at best) financing demand, reduced spot demand from fabricators and a possible drop in term volumes is why most are expecting refined metal imports to be slower, and quite possibly significantly slower, over the next few months at least.
Headline net imports are also expected to be depressed by a counter-flow of exports from those smelters that can qualify for the improved tax status of “tolling” contracts.
None of which means that Chinese real demand for copper is not going to pick up momentum over the first part of this year.
“Hard landing” has been avoided and all the most recent indicators point to a period of re-acceleration in both manufacturing activity and infrastructure spend, which can only benefit an industrial commodity such as copper.
However, China will produce more refined copper itself this year, in theory reducing demand for imported units.
Domestic production rose by 11 percent last year with a marked pick-up over the second half of the year. December’s national output of 6.8 million tons annualized may overstate the trend but shouldn’t detract from the fact that annualized run-rates were consistently above 6 million tons from August through December.
The flip side to this trend has been a sharp rise in imports of copper concentrates, up 23 percent last year and hitting consecutive monthly records over the October-December period.
This is part of a longer-term evolution.
Analysts at Barclays Capital, for instance, note that in 2009 36 percent of China’s copper imports were in the form of concentrates and 64 percent in the form of refined metal. By last year that ratio had shifted to 41 percent concentrate and 59 percent refined.
This year the bank expects the process to continue “with refined imports potentially dropping below 50 percent.” (Base Metals Focus, Feb. 8, 2013).
The accelerator here is not China’s appetite for more concentrates but the world’s ability to deliver that material.
Years of systemic shortfall at the mine level in the copper market are transitioning to better availability thanks to a combination of new mines such as Oyu Tolgoi in Mongolia and improved performance at existing mines such as Escondida.
China can be expected to soak up just as much concentrate as the rest of the world can supply. It is, after all, a cheaper option that importing the metal in refined form.
So how might Chinese imports of refined copper surprise on the upside this year?
Three ways spring to mind.
Firstly, financing demand for “imported” metal might turn out to be more resilient than expected.
Exactly who is doing what in terms of the copper collateral trade is poorly understood, even, it appears, by the Chinese authorities.
There have been repeated clampdowns on some of the most egregious practices, such as using metal for multiple collateral deals. Yet appetite for the trade appears largely undiminished and its demise has already been repeatedly greatly exaggerated.
It’s got nothing to do with end-user demand but metal flows for financing purposes risk keeping headline “import” levels high, even if the metal is not strictly speaking imported to the mainland at all.
Secondly, mine supply is certainly much improved but has it really recovered to the level implied by the last couple of months’ worth of concentrates import figures?
Analysts at Macquarie Bank argue that imports at the pace seen in Q4 2012 are “unsustainably high” and “we expect the concentrate market to tighten in H1 2013.”
That implies lower treatment charges, reduced smelter profitability and ultimately lower Chinese capacity utilization.
Quite evidently, if this were to be the case, there would be a knock-on impact on likely demand for imported units.
Particularly if China’s copper industry shifts from destocking to restocking mode.
This is perhaps the most significant “known unknown” in the Chinese copper dynamic this year. Macquarie, citing its own survey of Chinese copper industry participants, notes that “copper inventory at smelters and fabricators has reached a critically low point.”
Any collective move to re-stock would probably affect that Shanghai bonded warehouse mountain first. There are something like a million tons of metal sitting in Shanghai. Sounds a lot but not if the entire copper supply chain in China is about to refill.
The iron ore market offers a recent example of what a collective re-stock by Chinese buyers can mean.
— Andy Home is a Reuters columnist. The opinions expressed are his own.
But if it happens in copper, don’t expect import flows suddenty to jump, not before availability of that Shanghai buffer stock is tested.
That means that physical premium levels for Shanghai bonded metal will be the key leading indicator in terms of potential Chinese copper surprises this year.
