(The opinions expressed here are those of the author, a columnist for Reuters.)
* Long-term copper import mix: tmsnrt.rs/2yIJ1ce
* Trade in refined copper: tmsnrt.rs/2yJ7pdA
By Andy Home
LONDON, Sept 28 (Reuters) - The metals market used to treat China’s copper trade figures as a mirror on the world’s industrial growth engine.
The more copper, particularly refined copper, China imported, the healthier the outlook for manufacturing activity and demand for all industrial metals.
That’s no longer the case.
The copper mirror has been distorted over the years by stocking cycles, the complex flow of metal through China’s bonded warehouse zones, and an increase in the country’s own refining capacity.
There is still plenty of interesting information in the monthly copper trade data. It’s just that it tells us more about the state of the copper market than about the state of China.
Graphic on China’s Copper Import Mix 2003-2016:
China’s increased smelting and refining capacity has seen its appetite for mined copper concentrates grow exponentially in recent years.
Imports rose from 6.4 million tonnes (bulk weight) in 2011 to 17.0 million in 2016.
However, the pace of import growth has braked sharply from 28 percent last year to just 3 percent in the first eight months of this year.
That reflects reduced availability of concentrates.
The International Copper Study Group (ICSG) estimates that global mined copper output fell 2 percent in the first half of the year.
The mid-decade wave of additional supply from new mines and expansions had largely run its course by the start of 2017, with the structural slowdown compounded by a high disruption rate in the first quarter.
The impact of that supply stress early in 2017 is evident in the mixed fortunes of two of China’s biggest concentrate suppliers.
Imports from Chile have fallen 7 percent so far this year, reflecting both longer-term stagnation in Chilean copper output and production losses from a 43-day strike at Escondida, the world’s largest single copper mine.
Imports by China from Peru, by contrast, have risen by 16 percent, the tail end of a national production surge on the back of new mines such as Las Bambas. Indeed, the country has taken over the top concentrates supplier spot from its neighbour.
The fact that China’s overall concentrates imports are still rising at all, however, is a sign that the copper supply chain has been running more efficiently since the first three months of this year.
The output shortfall from last year is narrowing, according to the ICSG, which estimates global mine output was down by “only” 1 percent year-on-year in the second quarter.
Another sign of improved availability is the fact that Chinese smelters are lifting the floor price for their conversion fees.
Treatment and refining charges for the fourth quarter have been raised by over 10 percent to $95 per tonne and 9.5 cents per pound from $86 and 8.6 cents in the third quarter.
China has been a major buyer of copper scrap for many years but imports seemed locked into a long-term structural downtrend, having fallen for four consecutive years through 2016.
That has changed this year.
A recovering copper price has unleashed a global wave of scrap metal that had been hoarded during previous years when prices were lower.
China has feasted on this alternative copper source with imports up 14 percent to 2.4 million tonnes (bulk weight) during the January-August period.
Indeed, at both the national and global level, scrap availability has provided an important offset against struggling concentrates supply.
Global refined copper output using concentrates fell 1.5 percent in the first half of 2017, but production from scrap rose by 12.0 percent, according to the ICSG.
Judging by China’s robust imports of 310,000 tonnes of scrap in August, the surge is still running.
One important exception to this broader trend comes in the form of still-falling imports of scrap from the United States, which was China’s top supplier as recently as 2015.
It’s still a little unclear as to why this is happening. One suggestion is that it reflects importers’ increasing focus on higher-grade scrap as they position themselves for possible regulatory changes in China next year.
Whatever the reason, reduced export demand for scrap is contributing to ample copper supply in the United States, as shown by steadily rising stocks in COMEX warehouses. At 193,956 imperial tons, these are at their highest level since 2004.
Graphic on China’s refined copper trade:
The scrap surge and still-rising imports of concentrates have translated into China scaling back its refined metal purchases this year.
Imports of 2.1 million tonnes in the January-August period were down almost 500,000 tonnes on the same period of last year.
The drop in net imports was smaller at about 360,000 tonnes due to a sharp 35 percent drop fall in exports.
Both figures, by the way, include almost 100,000 tonnes of imports from China itself, a curiosity of China’s tariff system that allows some smelters to “export” metal even if that means no more than a round-trip to a bonded warehouse in Shanghai.
Beyond the devilish detail, however, there is one clear take-away. China’s call on metal from the rest of the world has fallen by around half a million tonnes, a significant amount in a 23-million tonne market.
That help explains the sporadic heavy inflows of metal into the London Metal Exchange (LME) warehouse system this year, even if what arrives doesn’t hang around too long.
It also explains why LME time-spreads have been trading in consistent contango.
True, this week’s blowout in the cash-to-three-months spread CMCU0-3 to a multi-year high of $60 per tonne is probably down to the hasty unwind of financing deals in South Korea in the face of political uncertainty.
But the absence of any tightness in the nearby spreads has been a feature of the London market since the middle of last year.
China’s import mix tells us why.
Mined output has been running more smoothly than widely feared six months ago. Scrap supply is still washing through the market. And China’s reduced import appetite means more refined metal is floating around, even if it’s hard to spot outside of the steady build in COMEX stocks. (Editing by David Clarke)