COLUMN-How to explain China's surprising metals trade figures? Andy Home

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

By Andy Home

LONDON, Jan 28 (Reuters) - China set two notable records last year in terms of its metals trade with the rest of the world.

It (Other OTC: ITGL - news) exported record amounts of aluminium in the form of semi-manufactured products, a sign of domestic market glut that no-one seems to think is going to end any time soon.

But the country also imported more refined copper than ever before, an outcome that was even more surprising given another record year for imports of copper concentrates.

There were also bullish surprises in the zinc and nickel numbers and the release of the December and full-year trade figures on Tuesday generated something of a collective double-take in the London market, triggering flurries of short-covering activity across the base metals complex.

If Chinese manufacturing growth is flat-lining or worse, it's not obvious from the country's import demand with the obvious exception of aluminium.

But as ever with these figures, there is plenty of devil in the detail and it seems it is China's internal market dynamics that are the key factor at work right now.

Any read-through to the health or otherwise of manufacturing activity is being swamped by the profusion of supply developments as China's own producers react to collapsing prices.

COPPER CONUNDRUM

China's imports of refined copper hit a record 423,000 tonnes in December, pulling the full-year tally up to 3.68 million tonnes, also a record.

True, the year-on-year increase was relatively small at just 2.5 percent but given the level of global concern about the weakness of China's growth, it was still a surprising outcome.

Even (Taiwan OTC: 6436.TWO - news) more so when record imports of copper concentrates are factored into the equation. These increased for the fourth consecutive year and totalled 13.29 million tonnes (bulk weight).

In theory such elevated raw material imports should mean more domestic production, reducing the need for refined metal imports.

In years past such strong refined metal imports might have been explained by the need for units to underpin China's collateral financing trade. But this is a shadow of its former shadowy self after the fall-out from the Qingdao port (HKSE: 6198-OL.HK - news) scandal in 2014 and the unravelling of the currency and interest rate dynamics that made the trade so appealing.

Rather, these strong import flows seem to reflect China's confused and confusing domestic market picture.

One key takeaway is that demand growth hasn't completely disappeared even if it has drastically slowed. Import flows were strong even before December's record intake.

December, however, may be a sign of things to come given the number of supply-side changes that are now taking place.

Reeling from collapsed prices, the country's producers have pledged to cut production by around 300,000 tonnes this year and withhold another 200,000 tonnes from the market in the first quarter.

The government stockpile manager, the State Reserves Bureau (SRB), has also been persuaded to soak up 150,000 tonnes of local producer stocks, a departure from its previous pattern of quietly buying from the international market.

All of which will create an artificial shortfall of metal in a country that is seemingly awash with the stuff. After all, why otherwise would Beijing have acquiesced in buying up surplus stock at above-market prices?

Copper is a particular conundrum but similar things are happening in other metals.

ZINC SURGE

Take zinc for example.

Imports of refined zinc in December totalled 94,400 tonnes, which was the highest monthly tally since 2009.

Full-year imports had been running way below last year's levels but strong fourth-quarter flows lifted the 2015 total to 543,400 tonnes, just 25,000 tonnes shy of the 2014 tally.

This has little to do with demand, since galvanised steel production is struggling just as much as other parts of the Chinese steel sector.

Rather, it too is more about supply.

Chinese producers have indicated they will take 500,000 tonnes of capacity off-line this year, matching the cuts to mined production announced by Glencore (Xetra: A1JAGV - news) last October.

Those Glencore cuts have accelerated a tightening in the zinc concentrates market due both to the scheduled closure of big mines such as Century (Shenzhen: 300078.SZ - news) in Australia and Lisheen in Ireland and price-related closures in China itself.

The reaction by China's smelters has transmitted that raw materials tightness through to the refined metal part of the supply chain in the form of what looks like panic buying.

There is no shortage of zinc in the rest of the world to feed China's reinvigorated appetite for the stuff but the relocation of existing inventory into the country may well be the intended consequence of Glencore's slow-fuse mine cutbacks.

Graphic on China's nickel imports: http://tmsnrt.rs/1PBadcs

Graphic on China's exports of aluminium semi products:

http://tmsnrt.rs/1PB7gsn

NICKEL COMPLICATIONS

There has been less price-support action in the Chinese nickel market but that's because everyone is banking on the imminent demise of the country's nickel pig iron (NPI) producers.

Not only are these thought to be relatively high cost but they are running short of the nickel ore they need to operate.

Indonesia has disappeared as a source of ore since that country's early 2014 ban on the export of unprocessed minerals. Ore imports from the Philippines, meanwhile, fell by almost six percent last year, suggesting this alternative source of supply may have peaked.

Chinese NPI production has been falling and it would be tempting to link that fact with surging imports of ferronickel and refined nickel.

However, the truth may be a little more complex.

Ferronickel imports more than doubled last year to 653,000 tonnes. But the figures include a significant flow of material from Indonesia, where Chinese companies have been investing in processing plants. Such was always the goal of the Indonesian ban.

This material, though, is closer to nickel pig iron than it is to ferronickel. The average price of Indonesian "ferronickel" imports in November was just $997 per tonne in November. That for imports from every other supplier was over $2,000 per tonne.

Strip this particular flow of Indonesian material out of the equation and last year's imports were up by a more modest 55 percent, which may be a more telling reflection of what's going on with China's NPI sector.

There is a different complication with the doubling of refined imports last year to 303,400 tonnes.

The largest component of this import surge was Russian, with imports from that country leaping from 75,000 tonnes in 2014 to 194,000 tonnes in 2015.

But imports only really began accelerating around the middle of last year, when the Shanghai Futures Exchange (SHFE) listed Russian metal as deliverable against its new nickel contract.

SHFE warehouses now hold over 60,000 tonnes of nickel, much of it imported, and the betting is that more will follow to meet deliveries against big short positions in May.

In principle the NPI effect must be somewhere in the mix but it's not nearly as accentuated as implied by the trade figures.

ALUMINIUM GLUT

And then there is aluminium.

China's aluminium producers have also pledged production cuts in exchange for government finance for stockpiling unsold metal.

However, such is the current structural overcapacity in the country that huge amounts of surplus are still seeping out in the form of semi manufactured products.

Exports of semis, and that should at least partly read "semis" given the compelling evidence that some are really metal transformed just enough to qualify for export rebates, rose by 14 percent to 4.2 million tonnes last year.

With Chinese smelters doing just about everything possible to avoid permanently closing capacity, there is no collective expectation that such exports won't continue rising further this year.

Aluminium should serve as a reminder that all is not well in the metals state of China.

Strong imports of copper and zinc may suggest otherwise but part of what is being imported is simply replacing domestic supply that is either being quarantined in "strategic" stockpiling or taken off-line.

Both strategies are a reflection of domestic market surplus not shortfall. Genuine shortfall will depend on just how disciplined China's producers prove themselves to be over the coming year. (Editing by Susan Thomas)