COLUMN-Worried about China? Ask a metals trader: Andy Home

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

By Andy Home

LONDON, Aug 26 (Reuters) - Everyone's worried about China.

Collective concern about what exactly is happening in the world's second-largest economy is roiling all parts of the financial universe.

Industrial metal markets have not been immune and the price of copper, viewed by many investors as a proxy for industrial activity, hit a fresh six-year low of $4,855 per tonne on Monday.

But while the rest of the world seems shocked that all is not as it should be in the industrial powerhouse that is China, metal traders have been grappling all year with the implications of a Chinese slowdown.

The omens were there as early as January, when London copper prices fell almost 12 percent in two days after a bear attack led by Chinese funds. They were expressing what with hindsight looks a good call on the impact on Chinese demand of weakness in key metallic parts of the economy such as construction, automotive and manufacturing.

While other markets now fret about the potential for a "hard landing" in the Chinese economy, industrial metal markets have arguably been living with just such a scenario for many months.

Right now sentiment is king across all markets with fear and panic breeding more fear and panic, but industrial metals, which first felt the chill winds from China, may offer some light in the current gloom and doom.

ALL ABOUT SUPPLY?

Few saw the January bear raid on copper coming.

Sure, copper prices had been trending lower for four years from their peak above $10,000 per tonne in early 2011.

But the narrative was all about supply, as the world's copper miners gradually lifted output after years of collective underperformance and lack of investment in new capacity.

The story was the same in iron ore with slumping prices attributed to a wall of new supply being brought on by both majors such as Rio Tinto (LSE: RIO.L - news) and BHP Billiton (NYSE: BBL - news) and a host of new players.

No one was that worried about actual demand, first and foremost in China. A mild slowdown was expected. How could it not be, given Beijing's mantra of steering the economy away from fixed asset investment to a more sustainable consumer model?

But most commentators, and crucially most producers, took a sanguine view that China would continue sucking up ever greater quantities of raw materials, just at a slightly slower pace.

It (Other OTC: ITGL - news) took a while for the narrative to catch up with what those Chinese funds were betting on back in January, namely that the slowdown was going to be a lot harder than most expected. ******************************************************* Graphic on Chinese stainless steel production: http://link.reuters.com/ryc55w Speculators betting on lower LME copper, beware *******************************************************

"HARD LANDING"?

Consider, for example, a market such as stainless steel, a high-end alloy that sits much closer to the end-user than the producer on the supply chain. Like copper, stainless has a multi-faceted usage profile across a broad spectrum of industrial and manufacturing applications.

Chinese production of stainless fell by 1.4 percent year-on-year in the first quarter of 2015.

That may not sound much but Chinese output had been growing at double-digit rates over the preceding five years. The last quarter in which the country's output actually fell was back at the start of 2009, when global manufacturing was still spiralling downwards in the wake of the global financial crisis.

In that context, a contraction of "only" 1.4 percent feels very hard.

And since China's share of global stainless production had grown steadily from 29 percent at the end of 2008 to 55 percent at the end of 2014, the shockwaves have travelled far beyond China's own borders.

Look no further, by the way, to understand why the price of nickel, the key alloying agent in stainless steel, has bombed despite structural supply issues after Indonesia's January 2014 ban on exports of nickel ore.

It was only in July that analysts at Goldman Sachs (NYSE: GS-PB - news) posited a scenario that metal prices had been telling us all year.

In "Revealing China's commodity 'hard landing'" (July 20, 2015), they argued that Chinese demand for commodities such as industrial metals had not just slowed earlier this year but had actually contracted.

The Goldman view remains hotly disputed within the metals community but it looks ever less controversial with each passing data release, such as the steady downtrend in the Caixin/Markit Manufacturing PMI or the recent string of anaemic power output figures.

SLOWDOWN NOT MELTDOWN

From the perspective of any metals trader, the current fixation on China's tricky balancing act between re-engineering its economy whilst not losing too much growth momentum is not news at all.

All that has really changed is the broader deterioration of sentiment, a phenomenon that has evidently not been helped by Chinese policymakers' panicky response to imploding local stock markets.

Sentiment is itself a powerful driver. But the irony is that having already been battered by their own micro Chinese "hard landing" in the first six months of this year, metal markets are showing signs of stabilising, albeit with heightened volatility.

Iron ore is trading around $53 per tonne, compared with July's historic low of $44.10. Base metals, first and foremost copper, are displaying increased spread tension, putting traders on alert for a reaction to the recent waves of selling.

The obvious historic pricing reference point is the global financial crisis of 2008-2009 but there is no sign of manufacturing apocalypse.

Not even in China.

Goldman analysts, for example, wrote in that same July report they were anticipating "a continued slight improvement" in metals demand on a combination of modest credit easing (tick after Tuesday's interest rate cut) and targeted infrastructure spend on areas such as the national power grid.

China's import volumes may have dropped a little but are still robust.

Iron ore imports were down just 0.1 percent in the first seven months of this year. Those of refined copper fell a bit harder by 9 percent but then imports of copper concentrates rose by 11 percent, simply meaning China is capable of producing more of its own metal than it used to be.

Imports of refined nickel, by the way, were the second-strongest ever in July despite weakness in the country's stainless steel sector. A sign maybe of the micro, in this case nickel's supply stresses, trumping the macro of weaker steel output.

China's real impact on metal markets this year has been more on price than on volumes, initially because producers were not expecting any significant slowdown at all and now because of the overarching bear sentiment that is gripping just about every financial market.

And, it hardly needs adding, because there is still a lot of uncertainty about the outlook for Chinese metals demand.

Even Ivan Glasenberg, chief executive at Glencore (Xetra: A1JAGV - news) with its reputed all-seeing eye, admitted "it's hard to predict what China is doing".

If China was in real meltdown mode, it wouldn't be hard to predict at all.

(Editing by Dale Hudson)