COLUMN-No simple signals from China's Q1 metal imports: Andy Home

(The opinions expressed here are those of the author, a columnist for Reuters.)

By Andy Home

LONDON, April 23 (Reuters) - Copper was once again the stand-out in China's first-quarter imports of industrial metals.

Net (Dusseldorf: NETK.DU - news) imports of refined copper surged by 71 percent year-on-year to 946,000 tonnes, representing an additional call on units from the rest of the world of almost 400,000 tonnes.

That sort of import demand would once have had the bulls charging ahead. Not any more, though. Copper was the worst performer of the base metals traded on the London Metal Exchange (LME) during the first three months of 2014.

Nickel has been, by some margin, the best price performer this year. Yet China's net imports of refined nickel slumped 35 percent in Q1 2014.

Such contradictory outcomes say much about how both China's import demand for metals and the market's interpretation of that demand are changing. ******************************************************* Graphic on China's Q1 2014 refined metals trade: http://link.reuters.com/cev68v *******************************************************

SHUFFLING STOCKS

China's first-quarter imports of refined copper, aluminium and zinc all rose year-on-year, while those of nickel, tin and lead fell.

Indeed, China remains a consistent net exporter of lead, extending a trend that started at the end of 2012. Net first-quarter lead exports were small at just 7,000 tonnes. But that may be just the tip of the iceberg if metal is leaving the country in forms such as lead plate, which don't make it into the headline figures.

Even in the case of metals for which China's import demand has increased, however, any linear relationship with the underlying state of its manufacturing demand has broken down.

Copper is the best example of this phenomenon.

The market is aware that China's imports go to fulfill two types of demand - from copper manufacturers and from financiers bringing metal into Shanghai's bonded warehouse zone for use as collateral in the shadow credit market.

Such financial demand is widely believed to have been the most important driver of the Q1 import surge.

To what extent is difficult to quantify, given the lack of statistical visibility on the copper financing trade, but the broad consensus is that Shanghai bonded stocks almost doubled to around 800,000 tonnes over the course of the first quarter, pretty much matching the extra metal "imported".

If the consensus is right, China's Q1 imports were more about the relocation of stocks than a shortfall in manufacturing.

Further confusing any import price signal is the fact that the Shanghai bonded warehouse zone sucks in metal from both directions.

Chinese copper smelters, for example, are thought to be actively stepping up what they describe as "exports" into bonded stocks, although such shipments are not counted as such in the official customs figures.

Signs of tightness in the domestic market, including a drop in stocks or backwardation on the Shanghai Futures Exchange , therefore, do not automatically presage more imports, just another relocation of metal already "imported" into Shanghai bonded warehouses to the mainland.

It's a similar story with increased imports of zinc and aluminium in the first quarter, since it is hard to construct a fundamental argument that China actually needs extra supply of either to meet manufacturing demand. Or at least not on a consistent basis.

Zinc in particular has emerged as the "poor man's copper" in terms of loan collateral, partly because of its lower price and partly because of the increasing regulatory scrutiny on the copper collateral trade.

In both cases, though, the key take-away is that stronger Chinese imports are not in themselves a bullish signal, with metal arriving in the country probably just adding to dark inventory. ******************************************************* Graphic on China's Q1 raw material imports: http://link.reuters.com/qev68v *******************************************************

AWAY FROM THE HEADLINES

If you're looking for the real story in China's metals dynamics these days, you need to look below the headline refined metal trade figures into what's happening at the raw materials stage of the supply chain.

One of the reasons, for example, that the market is apparently disinterested in those bumper Q1 imports of refined copper is the accelerated flow of copper concentrates into China.

These surged 24 percent to 2.7 million tonnes (bulk weight, not metal contained), a sign of ample global mine supply and a harbinger of increased domestic production of refined copper, which over time should reduce the manufacturing sector's refined import requirements.

Such bearish signals emanating from China's concentrates trade have swamped any feel-good factor in its refined metal trade.

Tin is another good example of how raw material flows are altering the headline trade figures.

China has been a net importer of refined tin since 2007, but the pace of imports has dropped sharply since around the middle of last year. Its first-quarter net imports of 1,722 tonnes were less than half the amount imported in the first three months of 2013.

This is in part a normal destocking cycle, but in part it also reflects a new flow of tin raw materials from Myanmar.

Tin concentrate imports tripled last year and rose by another 17 percent in the first quarter of this year, with material from Myanmar accounting for 95 percent of the 38,300 tonne flow. Although this material is low-grade, judging by the dollar value of the imports, the new source of supply for Chinese smelters has helped reduce refined metal needs.

SHIFTING FLOWS

Shifts in raw materials flows hold even greater significance in terms of the nickel and aluminium markets.

The fundamental story behind nickel's stellar run this year has been the Indonesian ban on ore exports, most of which have historically gone to feed China's nickel pig iron (NPI) sector.

Sure enough, March imports of Indonesian ore collapsed to below 1 million tonnes for the first time since October 2010.

Quite evidently, the fact that refined metal imports also fell in Q1 tells us that this loss of material hasn't yet cascaded down the supply chain, probably because of the high stocks accumulated by Chinese importers and traders in anticipation of the January ban.

Nickel bulls will contend that it is just a matter of time before NPI closures in China reinvigorate refined nickel imports.

How long exactly, though, will depend on whether buyers can find alternative supplies.

The Q1 figures suggest they will struggle at the ore/concentrates stage of the supply chain, notwithstanding increased imports from Zimbabwe and Vietnam.

Increased imports of ferro nickel may, though, suggest another possible avenue for China's stainless sector. At 75,000 tonnes, Q1 imports were up 81 percent year-on-year and the highest first-quarter tally in at least five years.

The Indonesian ban has also cost China's aluminium producers an important source of bauxite.

There are more potential alternative suppliers of bauxite than there are of nickel ore, and China's Q1 import figures show a widening net of origin countries including Ghana, Brazil and the Dominican Republic.

There has also been a commensurate increase in imports of alumina, the intermediate product that sits between bauxite and refined metal in the aluminium supply chain.

So while China's bauxite imports fell by 5 percent in Q1, those of alumina surged by 43 percent in compensation.

Such shifts at the raw materials stage are far more significant than the extra 100,000 tonnes of so of primary aluminium imported in the first three months of the year.

The days of simple signals from China's metal imports are past. Welcome to the new age of complexity. Just ask a copper trader! (editing by Jane Baird)