April 30, 2020 / 1:01 AM / a month ago

RPT-COLUMN-China's metals imports reflect growing supply disruption: Andy Home

(Repeats without change (The opinions expressed here are those of the author, a columnist for Reuters.))

* China’s copper concentrates and scrap imports:

* tmsnrt.rs/2W3rw2I

* China's trade in refined tin: tmsnrt.rs/3f0VsVH

* China's nickel import mix: tmsnrt.rs/2zJwOJn

By Andy Home

LONDON, April 29 (Reuters) - China may be on the road to COVID-19 recovery but its giant industrial metals industry faces the new challenge of maintaining global supply chains of raw materials.

Key supplier countries such as Peru, Chile and the Philippines have been going through their own quarantines and restrictions in the fight against the coronavirus.

China’s first-quarter trade figures capture these accumulating supply tensions, with import volumes of ores and concentrates dropping and flows of scrap, an important part of the raw materials mix, drying up.

In the case of copper and tin, the impact has started to translate into a greater call for refined metal imports despite the precipitous drop in domestic demand seen over the first three months of this year.

In the case of nickel, the pressure is being partly offset by an ongoing shift in the type of raw material now heading to Chinese processors.

The initial COVID-19 metals demand shock appears to have passed in China. There may well be a second-phase impact to come but right now it is the shock to global mine production that looms large in China’s metals trade figures.

COPPER CONSTRAINTS AND TIN TURBULENCE

China’s imports of refined copper and tin both rose over the first quarter despite a drop-off in first-use demand as manufacturers reduced activity due to the combination of the Lunar new year holiday and restrictions on movement across the country.

Volumes of refined copper imports grew by 7% to 895,000 tonnes in January-March, the highest first-quarter total since 2016.

Spillover shipments from 2019 and some price-related stocks build may well have been in the mix, but so too were constraints on both imports of mined concentrates and scrap.

Concentrate imports fell by 1% in the first quarter, which was the first break of a strong uptrend running since early 2015. China has built out a lot more smelter capacity in recent years, increasing its call on mined concentrates from countries such as Peru, where the lockdown has taken a heavy toll on mine operators.

Compounding the problem for China’s copper sector is a simultaneous hit on scrap flows. These fell sharply over 2018 and 2019 as Beijing steadily tightened purity thresholds on imported material.

A reclassification of higher-quality scrap as a raw material resource represents a significant boost for imports.

But locked-down scrap collection chains in supplier countries are now restricting shipments. Imports of copper scrap slumped by another 39% in the first quarter to 210,000 tonnes.

Scrap generation in China itself has been disrupted, causing headaches for both the refineries that convert it back to refined metal and the manufacturers who use it in their input mix.

With concentrate availability also disrupted, a shortage of scrap is one likely driver of higher refined metal imports.

China’s tin sector was upended by the country’s quarantine measures and producers are now also facing margin compression from low prices.

The country removed an export tax at the start of 2018 and was a net exporter of refined material year over both that year and 2019.

However, it flipped back to net importer to the tune of 1,900 tonnes in January-March, suggesting continuing supply issues in the domestic market.

Reduced raw materials flow from Myanmar is an ongoing headache for several Chinese producers. Restrictions on movement across the border have compounded what was already a steady decline in imports of tin concentrates from Myanmar.

Total concentrate imports, the bulk of which come from China’s neighbour, slumped by 20% last year and were down another 18% in the first quarter.

NICKEL ORE IMPORTS DROP

China’s imports of nickel ore and concentrates fell by 19% in the first three months of 2020 with March’s tally of 1.6 million tonnes the lowest monthly total in two years.

Imports of what is a core raw material for China’s nickel pig iron (NPI) producers have been hit by the combination of Indonesia’s ban on exports and the shutdown of several big miners in the Philippines.

A gradual return to production is now on the horizon in the Philippines but it may come too late to prevent a squeeze on ore availability.

Some of the ore supply gap is being filled by higher Chinese imports of NPI from Indonesia. This reflects both an ongoing off-shoring of Chinese NPI production capacity and a national mining sector that has been left relatively unscathed by coronavirus restrictions.

Import volumes of both NPI and conventional ferronickel more than doubled year-on-year to 800,000 tonnes.

That may be why disruption at the ore segment of the production chain has not yet translated into higher demand for imported refined nickel. Net imports in the first quarter were modest at 13,500 tonnes, down from 38,000 tonnes last year.

LEAD AND ZINC - SIGNS OF STRESS

China’s net imports of refined lead collapsed to just 900 tonnes in the first three months of the year from 48,000 tonnes in the quarter of 2019. Those of refined zinc slumped by 51% to 68,000 tonnes.

In both cases this was to be expected given a pre-COVID-19 narrative of markets moving to significant raw materials surplus after a period of shortfall.

However, things are panning out slightly differently with lead facing a combination of lower scrap generation, a key part of the lead-acid battery production chain, and lower mined concentrates imports.

These were down by 20% on year-earlier levels at 265,000 tonnes bulk weight. Although not yet evident in terms of refined metal trade, the lead supply chain in China has been tightening, with visible stocks on the Shanghai Futures Exchange sliding to an 18-month low of 7,074 tonnes.

Zinc smelters fared batter in the first quarter in terms of maintaining flows of raw material, with imports of zinc concentrate up 26% year-on-year at 1 million tonnes bulk weight.

How long such volumes can be maintained is a moot point.

Expectations of massive oversupply in the zinc concentrates market are being rapidly revised as Latin American supplies are restricted by continuing mine curtailments.

The impact on trade flows may be so far muted but supply tightness is increasingly visible in the zinc concentrates market, where spot treatment charges have fallen to a one-year low of $245 per tonne.

This year’s benchmark terms of $299.75 per tonne, a 12-year high in terms of smelter revenues, are already looking slightly outdated.

The annual deal was negotiated against a backdrop of ample concentrates availability. Analysts such as CRU Group’s Dina Yu are now talking about the potential for Chinese smelter curtailments later this year.

The shift in market focus suggests China’s global raw materials import chains are expected to come under yet more pressure in the coming months.

Editing by Louise Heavens

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