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COLUMN-China's first-quarter metal imports say more about supply than demand: Andy Home
(Repeats, without changes, item first published on Monday)
By Andy Home
LONDON, April 25 (Reuters) - What is going on in China?
That question looms largest of all in determining whether base metal prices have bottomed out.
A renewed bout of government stimulus appears to have halted the slide in manufacturing activity but is it sustainable or merely a short-term tonic?
If you're looking for an answer in first-quarter metals imports, you're going to be disappointed.
The picture is highly fragmented, varying from boom in metals such as copper and zinc to bust in the case of aluminium and lead.
This is largely because what China is currently importing says more about supply than demand.
COPPER - ABSORBING GLOBAL SURPLUS
The stand-out from the January-March trade figures was copper.
March imports of refined metal set an all-time record high of 458,000 tonnes. First (Other OTC: FSTC - news) quarter imports surged by 36 percent to 1.11 million tonnes, while net imports rose by 306,000 tonnes year-on-year to 1.07 million.
The strength of the inbound flow has got analysts scratching their heads.
It (Other OTC: ITGL - news) 's clear that much of the refined copper going into China is not going to feed manufacturing demand.
Inventory, both that which is visible on the Shanghai Futures Exchange (SHFE) and that which is partially visible in the bonded warehouse system, has risen over the first part of this year. Physical premiums for bonded metal are soggy at around $50 per tonne.
There is even speculation that local producers may be about to step up exports of metal due to weak local demand , although there was no clear evidence of this in the March figures. Refined copper exports of 23,375 tonnes were the highest since May last year but far from exceptional.
The fact that China is also absorbing huge amounts of mined copper concentrate clouds an already confused picture since higher raw materials imports should feed through to higher domestic production and reduced import appetite.
The simplest explanation for what is going on is that the combination of good global availability and low prices is incentivising China to absorb the world's surplus of copper in all forms.
And the inference is that it will continue doing so until the domestic market is absolutely saturated.
Graphic on China's copper imports: http://tmsnrt.rs/1QwMWZn
Graphic on China's zinc imports: http://tmsnrt.rs/1QwMPgp
Graphic on China's nickel imports: http://tmsnrt.rs/1QwMxq3
ZINC AND NICKEL - DOMESTIC DEFICITS?
Imports of both refined zinc and nickel also surged in the first three months of the year.
Net (LSE: 0LN0.L - news) imports of zinc jumped to 176,300 tonnes, up from just 42,400 tonnes last year and the second-highest first-quarter tally after 2014.
Unlike copper, rising refined metal imports contrast with falling mine concentrate imports, down 10 percent at 649,000 tonnes (bulk weight).
This appears to bear out the current market narrative of a rapidly tightening concentrates market due to a combination of mine attrition and the mine cuts announced by Glencore (Xetra: A1JAGV - news) last October.
If Chinese smelters are struggling to source enough raw material to feed the domestic market, as suggested by the cutback announcements made at the end of 2015, it would make sense that imports of refined metal would rise accordingly.
And a very similar dynamic would explain why China's net imports of refined nickel are also on a surge right now, having risen from just 11,600 tonnes in the first quarter of 2015 to 106,100 tonnes in the first three months of this year.
In this market domestic supply hinges on output of nickel pig iron (NPI), which in turn is dependent on imports of ore.
With (Other OTC: WWTH - news) flows from Indonesia cut off since it banned ore exports at the start of 2014, NPI producers have been living off their stocks and a secondary flow of ore from the Philippines. The latter has slowed significantly over the first part of this year and NPI output is now trending lower.
The relationship with refined nickel exports, however, has been disrupted since the start of nickel trading on the Shanghai Futures Exchange (SHFE) last March.
The ability to deliver Russian metal against the SHFE contract has fuelled a sharp rise in such imports, almost 74,000 tonnes in the first quarter compared with total refined imports of 108,600 tonnes.
In theory, rising imports of ferronickel should be a more accurate gauge of domestic market supply stress but the apparent surge to 187,000 tonnes from 121,800 tonnes in the first quarter of last year also needs to be treated with caution.
A significant part of this year's inbound flow, 112,500 tonnes, has been in the form of material from Indonesia which is priced at a level closer to NPI than ferronickel. That reflects the ramp-up of Chinese steel maker Tsingshan's NPI plant in Sulawesi. nL8N12D0TC
In short, tightening availability in China's domestic market is almost certainly causing imports to rise, but not by as much as the headline figures for refined metal and ferronickel might suggest.
ALUMINIUM AND LEAD - DOMESTIC SURPLUS
Domestic market surplus, or at the very least self-sufficiency, is the key feature of both the aluminium and lead sectors in China.
China has been a net exporter of refined lead since 2013 and that trend continued this year with net exports of 11,235 tonnes in the first quarter, up from 10,700 tonnes in the year-earlier period.
It's worth noting that this seepage of refined lead is accompanied by a net outflow of lead products to the tune of a net 3,400 tonnes in the January-March 2016 period.
Aluminium is in a different league when it comes to Chinese domestic surplus.
The market has been watching for many months the steady rise in exports of semi-manufactured products, which not only escape China's 15-percent duty on exports of primary metal but receive VAT rebates.
The pace of those exports slowed in the first quarter but at 950,000 tonnes they were only down 120,000 tonnes on the prior-year period.
Moreover, March itself saw a renewed acceleration in outbound flows, 360,000 tonnes of them, the highest monthly tally so far this year.
Even (Taiwan OTC: 6436.TWO - news) more ominous has been the near evaporation of primary aluminium imports. Net imports fell in each of the last three years and the first-quarter total this year was a miniscule 838 tonnes.
Indeed, China was a marginal net exporter of aluminium in this form in March itself despite that swingeing export tax.
It remains a significant importer of raw materials, a mix of bauxite and alumina, but when it comes to primary aluminium, alloy and semi-manufactured products, it's what comes out not what goes into China that is the most salient market feature. (Editing by Ruth Pitchford)
