One of the major themes in the base metals markets so far this year has been the wide degree of price divergence as individual metals increasingly respond to specific supply-demand drivers.
This fragmentation is mirrored in the first-half import picture from China, the world’s largest user of industrial metals and raw materials.
A couple of years ago it was customary to view China’s metals trade as a proxy for the health, or otherwise, of the country’s manufacturing economy.
These days such an exercise would be futile, given the divergence of trends.
At one extreme sits copper. China remains structurally short of the metal and its import appetite is still the single most important determinant of the market’s underlying dynamics, although any read-through to manufacturing activity has long ago been obscured by financing demand.
Lead is at the other end of the extreme. Chinese demand is as important in this market as in any other industrial area, but the country has been a consistent net exporter of refined lead since the start of 2013.
The picture becomes even more confused at the raw materials level, where supply, particularly stalled Indonesian supply, has contributed to very different import patterns.
China’s first-half trade figures provide a fractured snapshot on the ways the country is interacting with global metal markets.
China’s refined copper imports decelerated over the course of the second quarter, hitting a one-year low of 255,000 tonnes in June itself. But they have still been much stronger than in the same period of 2013, when the country was going through one of its periodic destocks.
Net imports rose by 554,000 tonnes year-on-year to 1.74 million tonnes in the first six months of 2014.
The real significance of this increased pull from China is the scarcity it has generated everywhere else, particularly on the London Metal Exchange (LME), where registered copper stocks are hovering near multi-year lows.
How much of China’s imports has gone to meet manufacturing demand and how much is still sitting in a bonded warehouse, acting as collateral in the shadow credit markets, is a topic of much debate among analysts.
The International Copper Study Group, for example, estimates a 180,000-tonne build in bonded stocks in the first four months of this year.
Collateral financing has become embedded within the copper market, even after the Qingdaoport scandal showed the risks lurking in the darker shadows of the trade.
Qingdao, however, seems to have generated only a ripple rather than a tsunami of bonded copper leaving the country for a safer home.
Refined exports rose to 40,000 tonnes in June, the highest outflow since March 2013 but less than has been seen on several occasions in the past. Of the total, 17,500 tonnes headed toSouth Korea, which may explain the 10,000-tonne trickle of metal onto LME warrant at exchange warehouses in Busan. But there again, 21,000 tonnes left for Taiwan over May and June, none of it apparently going anywhere near an LME warehouse, which suggests that the Qingdaoeffect may be highly limited.
China bulls can take some heart from the continued downtrend in the country’s imports of copper scrap, down 15 percent in the first half of the year after falling 10 percent last year. Less scrap, likely due to a combination of price sensitivity and tightness in other parts of the world, pushes manufacturing demand into the refined metal sphere.
Imports of copper concentrate, meanwhile, continue to boom as China absorbs the ongoing surge in mine production. After rising by 29 percent last year, they were up another 22 percent in the first half of this year.
China’s net imports of primary aluminium jumped 267 percent in the first half of 2014, a figure that flatters to deceive since the extra volume amounted to no more than 121,000 tonnes, a drop in the country’s aluminium ocean.
More significant is the continued creep in what is coming out of China in the form of semi-fabricated products, a classification that may be overly loose, given local producers’ incentive to find a way round the prohibitive export tax on primary.
Semis exports rose by four percent to 1.29 million tonnes in January-June, extending a uptrend that has been running since the start of 2013.
Bigger changes are evident at the aluminium raw materials level, as China adapts to the January ban on exports of bauxite from its previous main supplier Indonesia.
Indonesian imports have dwindled to next to nothing, just 45,000 tonnes over the second quarter, leading importers to search further afield for new supply.
The Dominican Republic and Ghana have become regular features of the trade report, Chinaimporting 1.0 million and 460,000 tonnes respectively in the first half. Bauxite imports fromAustralia were flat year-on-year, but that may change going forwards as Rio Tinto has just completed the shuttering of its Gove alumina refinery, freeing up more bauxite for the export market.
No surprise, either, that China’s imports of alumina jumped by 68 percent to 2.8 million tonnes as importers replace lost bauxite with the intermediate product needed to make aluminium.
Indonesia’s ban on nickel ore exports has been the hot topic in the metal markets this year, sending the stainless steel input on a super-charged rally.
Indonesia has been the main supplier of ore to feed China’s giant nickel pig iron sector and the steady dwindling of shipments has caused total concentrates and ore imports to fall by 26 percent so far this year.
There has been some offset from rising ore imports from the Philippines, up 11 percent to 12.3 million tonnes, but the quality is known to be lower to the point that some of what is counted as nickel ore is best described as iron ore with nickel content.
As with bauxite and alumina, there has been a noticeable displacement of import demand up the value chain with net imports of ferronickel jumping 89 percent to 130,000 tonnes this year.
Nickel bulls, however, may want to note that there has so far been no impact on China’s appetite for refined nickel.
Imports actually fell by 11 percent to 76,000 tonnes in the first half of this year, while net imports fell even harder to just 31,000 tonnes, the lowest level in the first half of any year since 2004.
That reflects a steady stream of exports through the first six months of the year with a mini-surge in June itself. Last month’s exports of 18,000 tonnes marked a multi-year high.
Malaysia accounted for 7,600 tonnes of the July total, raising the possibility that there was a distress delivery into the nearest LME warehouse location against a short position.
But the underlying Q2 export trend was still strong, implying a well-supplied local market despite the turbulence coming from the Indonesian ore ban at the raw materials level.
With net refined zinc imports of 375,000 tonnes in the first half of 2014, China’s draw on metal from the rest of the world increased by around 100,000 tonnes year-on-year.
It’s an incongruous outcome given China itself is a massive zinc producer and one that has been struggling for a long time with overcapacity and resulting low production margins.
Most analysts still think that this flow of zinc into China is in large part a displacement of stocks, fuelled by a combination of copper-style collateral financing and arbitrage plays.
It’s noticeable that net imports of zinc alloy, arguably a product closer aligned to manufacturing activity, fell by 11 percent to 52,000 tonnes over the first six months of this year.
Down too were imports of zinc concentrates to the tune of five percent.
Lead is the contrarian stand-out in China’s metals trade picture. The country has been a net exporter of refined lead since the start of last year, even with a 10-percent export tax.
The trend continued into the first half of this year, with net exports rising to 15,500 tonnes from 8,200 tonnes in the same period of 2013.
There is a nagging suspicion that more may be leaving as more lighly-taxed lead “product”, a category that doesn’t get picked up in the headline trade figures.
China’s imports of refined tin maintained the slow pace of late 2013. Just 3,700 tonnes flowed into the country in the first half of this year, down from 7,400 tonnes in the same period of last year.
Is this because China’s tin smelters have found an alternative source of feed after the phase-out of lower-grade exports from Indonesia?
Certainly, imports of tin raw materials from Myanmar, a previously unknown source of the soldering metal, continue to dominate the tin trade figures. Imports from the country increased by 80 percent to 76,000 tonnes (bulk weight) in the first six months of this year.
Or is China merely going through a destocking phase? And, if so, is there a missing link in the trade figures? As with refined lead there is a lurking suspicion that metal may actually be leavingChina, just not in a form that hits the headlines.
An ever-timely reminder that sometimes with China’s metals trade, it’s what you don’t see and therefore can’t count that really counts. (Editing by David Evans)