LONDON (Reuters) - What will the Chinese New Year of the Dog bring for industrial metal markets?
China still dominates the pricing landscape for the base metals pack traded on the London Metal Exchange, albeit in increasingly complex ways.
East meets West physically in the form of China’s trade flows, although these too have evolved over time into a multidimensional matrix.
China’s January trade figures, released over the weekend, come with the usual interpretative challenges of two new year holiday periods but clearly signal a new configuration.
These are the emerging themes to watch for in the coming months.
Graphic on China's exports of aluminium semi-manufactured products: tmsnrt.rs/2otu2iF
China’s exports of aluminium semi-manufactured products (“semis”) are rebuilding momentum.
At 390,000 tonnes in December and 400,000 tonnes in January, they are once again running at the very top end of the range that has defined monthly flows for the last three years.
The timing is politically charged since U.S. President Trump is considering a range of potential trade sanctions against imports of aluminium, particularly aluminium “semis” from China.
But right now the mechanics of arbitrage are trumping politics and pushing surplus metal out of the country.
Despite the closure of “illegal” production capacity and winter heating season restrictions, metal is piling up in the Shanghai Future Exchange’s (ShFE) warehouse network. Stocks have risen from 100,722 tonnes at the start of January 2017 to a current record 811,839 tonnes.
Such tangible evidence of domestic oversupply has translated into ShFE prices lagging London’s bull run, leading to a widening arbitrage gap through which metal is now flowing.
Trump, however, may yet trump the arbitrage.
China is the largest overseas supplier of “semis” to the U.S. market and will be at the heart of any tariff disruption to global aluminium trade.
Graphic on China’s imports of copper scrap:
China’s imports of copper scrap haven’t historically grabbed the headlines but they might this year.
A series of overlapping restrictions on who can bring what sort of material into China resulted in some very low allocations in the opening rounds of copper scrap import quotas for this year.
That early warning sign of potential disruption to the scrap section of the copper supply chain appears to be born out by a slump in January imports.
They fell to 199,900 tonnes (bulk weight) from an average 262,000 tonnes in the fourth quarter of last year.
Imports last fell below the 200,000-tonne level in February 2015 and again in February 2016, both New Year holiday months.
Scrap interacts with two parts of the supply chain since it is used as feed by producers of refined metal and by product-makers.
If January’s slump is a sign of things to come, lower imports should feed through into higher import demand for both mined copper concentrates and refined metal.
It’s worth noting that refined copper imports have been running fast in the last three months at an annualised 3.89 million tonnes, compared with last year’s actual total of 3.24 million.
So too are imports of concentrates, running at an annualised 20.20 million tonnes (also bulk weight) over the same period.
Graphic on China’s imports of nickel ore:
China’s imports of refined nickel were robust in January at 26,700 tonnes, which would have represented a 15-month high except for December’s super-charged 41,300 tonnes.
This import strength feeds a bull narrative of winter heating season closures in the nickel pig iron (NPI) sector coupled with still solid demand from the stainless steel sector.
However, the most significant change this year will be the return of the NPI sector’s top historical supplier.
Indonesia last year relaxed its 2014 ban on exports of unprocessed ore and flows to China resumed in earnest in the second half of 2017.
January’s imports of Indonesian nickel ore were 1.09 million tonnes, the first time the one-million-tonne level has been broken since February 2014.
They also exceeded imports from the Philippines, which emerged as an alternative supplier during Indonesia’s absence.
The Indonesian authorities have approved a further 20 million tonnes of exports through October this year, suggesting a further acceleration in shipments in the months ahead.
Graphic on China’s refined zinc imports:
The big stand-out in last year’s trade flows was the return of China as a major importer of refined lead for the first time since 2012.
That import pulse looks to be fading, however, with just 40 tonnes entering the country in January.
It may be an outlier figure but fits into an emerging trend. Over the last three months China has returned to being a net exporter to the tune of 2,350 tonnes.
If China’s contribution to lead’s bull party is flagging, it’s still there for zinc.
China’s refined zinc imports hit a record 660,000 tonnes last year and the surge spilled over into January with the arrival of another 67,000 tonnes.
The largest single supplier last month was Spain at 17,609 tonnes, extending one of 2017’s import themes.
China’s continued appetite for imported zinc will be interpreted as another bull flag for a market that has already notched up 10-year highs this year.
However, a narrative of raw materials supply crunch clashes with the strength of China’s imports of zinc concentrate in January. At 344,500 tonnes (bulk weight) these were the highest monthly tally since September 2015.
The step-change came from Australian suppliers with imports jumping to a two-year high of 112,400 tonnes.
There may be some New Years’ distortion in January’s count but evidently a continuation of imports at anywhere near this pace will help lift domestic production and thus reduce demand for imported metal.
China has been a net importer of tin in refined form since 2007, just before the imposition of a 10-percent export tax.
That tax was quietly removed last year and it is noticeable that exports, largely to Hong Kong, have been creeping higher.
Last year’s tally of 2,181 tonnes was the highest since 2013 and January’s 568 tonnes was the highest monthly total since October of that year.
China turned marginal net exporter of refined tin around the middle of last year and it was again in January to the tune of 280 tonnes.
Last year’s net imports of 1,778 tonnes were the lowest since the 2008 tax change. The effects of its removal have been a slow-burn affair but China is now teetering on the edge of becoming a net exporter again.
Editing by Edmund Blair