China’s metals imports reflect supply as well

LONDON: Once again the strength of China’s metallic imports has surprised many commentators.
Construction sector clampdown? Manufacturing slowdown? The drags on the Dragon, as it is affectionately known in the metals markets, are multiple.
Yet you’d be hard pushed to spot any flow-through impact on the flow of metals and metallic raw materials into the country. July’s full trade report showed imports largely extending recent patterns.
But as any copper trader could tell you, what the country imports is not a linear read-through of copper fabricating activity.
Rather, import flows are a dynamic mix of manufacturing demand, overlaid by the country’s stocks cycle, investor demand, using metal as collateral, and opportunistic arbitrage.
Indeed, in some cases what China imports is less a reflection of the country’s demand for a specific metal than an indication of available supply.
Take, for example, imports of bauxite and nickel ore, both of which have been severely disrupted by Indonesia’s clampdown on exports of unprocessed materials.
China’s imports of bauxite have collapsed from an average of 3.8 million tons per month in 2011 to an average of 1.2 million tons over June and July.
Indonesian supply has almost evaporated. Imports from the country totaled just 400,000 tons over June and July. Last year they were running at an average monthly rate of 3.0 million tons.
Is this in any way a reflection of demand for aluminum feed materials? Hardly, given the country’s smelters are still churning the stuff out at close to record rates.
The strength of continuing demand is evidenced by the number of work-arounds Chinese importers have adopted to counter the Indonesian supply disruption.
Purchases from the country were front-loaded ahead of the ban. Other suppliers are being tapped, witness the jump in imports of Australian bauxite to a record high of 1.1 million tons in July.
And imports of alumina, which sits in the middle of the aluminum production chain, have mushroomed.
It’s a similar story with nickel ore from Indonesia.
The country has been the primary supplier of the key metallic input for China’s nickel pig iron (NPI) industry.
There is little doubting that the low nickel price is affecting the relatively high-cost NPI sector, although quantifying the impact is difficult since it is both highly fragmented and statistically opaque.
But demand for ore is evidently still strong.
Which is why imports from the Philippines have surged in compensation. July’s figure was a monthly record of 4.5 million tons and, as the next chart shows, accelerated flows from the Philippines have largely compensated for constricted Indonesian availability.
And as with the aluminum sector, reduced Indonesian supply has spilled over into rising imports of another form of equivalent input, ferronickel.
Imports of ferronickel more than doubled to 141,000 tons in the first seven months of this year. And in part that too reflects better international availability as restarted capacity in the Dominican Republic is complemented by new capacity starting up in Brazil.
In the case of both aluminum and nickel raw materials Chinese import patterns have been forced to change not by any fundamental shift in demand but to accommodate changing supply dynamics.
It’s an argument that can also be applied to iron ore imports, which reflect first and foremost the rest of the world’s ability to supply the quantities required by China’s massive steel sector.
There are subtle trade-offs between using imported rather than domestic iron ore, particularly at a time of falling prices, but the underlying reality is that Chinese demand is strong enough to require both supply streams.
Which is why China’s iron ore imports were still running at a robust nine-percent growth rate in the first seven months of this year and why there was no dramatic change to that pattern in July itself.
Weakness in China’s demand for steel products is affecting the price rather than the volume of imported iron ore.
Only a really dramatic collapse in actual steel production, still an unlikely prospect, would change that dynamic.
In the case of other metals, imports are completely divorced from Chinese demand trends.
Imports of primary aluminum and zinc have both been rising this year, up 184 percent and 67 percent respectively, with no change of trend in July itself.
In neither case is there a convincing argument that the world’s largest producer needs more metal.
Rather, an open arbitrage between London and Shanghai is causing accelerated flows, partly to meet heightened demand from those companies engaged in toll-processing and partly to facilitate the metal-as-collateral trade.
In both cases what is being imported is peripheral to China’s internal supply-demand dynamic.
Imports of aluminum in the first seven months of 2012 totaled 341,000 tons. Domestic production over the same period was 11.2 million tons.
Imports of zinc of 246,000 tons were similarly dwarfed by the 2.7 million tons pumped out by China’s own zinc smelters.
Indeed, the biggest structural component of China’s aluminum trade is not the amount of primary metal imported but the amount of fabricated product exported, 1.65 million tons of it over the January-July 2012 period.
Imports of both metals, in other words, are something of a side show, reflecting no more than the lure of a profitable arbitrage as London prices fall further than Chinese prices.
The complexity of China’s import dynamic is best seen in the case of copper.
As with iron ore and nickel China is structurally short of copper and must import to meet the domestic gap.
But that doesn’t mean that import levels move in line with actual fabricator demand for the red metal.
If they did, the 71-percent jump in net refined copper imports so far this year would be signalling an extraordinarily strong rate of usage growth.
Rather, the additional 800,000 tons imported in the first seven months of 2012 have in large part gone into stocks build in Shanghai’s bonded warehouse zone.
They have done so in anticipation that fabricator demand will recover later this year. But until then, they simultaneously act as collateral for financiers, an investment trend that has itself become a driver of import levels.
Manufacturing demand for imported copper is thus interwoven with financing demand and a stocks cycle that moves against the copper price cycle.
If you’re looking for a more straightforward linkage between Chinese imports and demand, you might be better off considering tin.
The soldering metal is too scarce to appeal to financiers and the lack of a tin futures contract in China limits easy arbitrage opportunities.
What enters the country, therefore, should be a good indicator of what China really needs in excess of its own production.
As such, the sharp 200-percent jump in refined tin imports to 16,200 tons this year is something of a stand-out among the latest trade figures, not least because imports in July itself were the strongest monthly print since February.
Yet, at least part of this import strength is also down to supply rather than demand. China’s own supply, in this case.
Chinese mined tin production has fallen 3.8 percent and its refined production by 4.0 percent over the year-to-date.
With the precipitous slide in the international price, it seems that part of China’s production sector has collectively decided it is more profitable to import metal than actually make it.
Strong tin imports are still bullish, not least because of their impact on availability in the rest of the world.
But they are bullish as much for what they say about China’s own production cost curve as what they say about Chinese tin usage.