(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON Feb 25 China imported record amounts of iron ore, nickel ore and bauxite in January. Imports of refined copper were the second-highest on record, while those of refined zinc were the fourth-highest.
Interpreting China's trade data at the start of any year is a thankless task because of the variable timing of the Lunar New Year holidays, which fell in early February this year.
That may well have inflated last month's imports as buyers rushed to clear material through customs in time for the holidays. Only with the release of February figures will we get a more useful basis for making year-on-year comparisons.
But that said, there is a still a clear unifying theme to the January import surge. Much of what entered the country last month has gone into stocks build rather than into meeting immediate demand.
In the case of nickel ore and bauxite, this is a direct reaction to the Indonesian ban on unprocessed minerals, in effect providing Chinese players a cushion against supply disruption and the resulting potential for price volatility.
In the case of others, most pertinently copper, rising Chinese stocks will only exacerbate existing tensions in the market with the potential for increased price volatility.
GET IT WHILE YOU STILL CAN
The Indonesian government banned exports of unprocessed minerals on Jan. 12, cutting off the supply of two key raw materials to Chinese buyers; bauxite and nickel ore.
Unsurprisingly, China's January import figures showed a last-minute dash to get as much as possible out of the country before the door slammed shut.
Imports of Indonesian nickel ore, used to feed China's nickel pig iron (NPI) sector, and bauxite, used to supply some of the country's alumina refineries, both broke through the six-million tonne barrier to hit fresh all-time highs.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's nickel ore imports: link.reuters.com/tyj27v Graphic on China's bauxite imports: link.reuters.com/bak27v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
Imports of both will almost certainly collapse in February, excepting the odd particularly slow boat to China.
The very purpose of this scramble for material is to build up buffer stocks against what promises to be a permanent disruption to Indonesian supply.
The exact size of those stocks is uncertain. Analysts at Macquarie Bank estimate China has accumulated 35 million tonnes of nickel ore and 40 million tonnes of bauxite, enough to satisfy local demand for many months.
They will be needed.
SWITCH OR WAIT?
Although some cracks are starting to appear in Indonesia's newly-erected export wall, the concessions cover only the tax treatment of copper concentrates. No-one is expecting any major roll-back of the ban on exports of either nickel ore or bauxite.
China will either have to bide its time until a new value-added export stream emerges in Indonesia itself or find alternative sources.
Signs of the latter are already evident in the case of bauxite.
Until April last year imports from Australia had broken the million-tonne-per-month mark only twice. Since then, imports have only fallen below that level in the single month of October. January's tally of 1.42 million tonnes looks like the new normal.
Moreover, Chinese aluminium producers have the option of replacing lost Indonesian bauxite with the intermediate product alumina. Last month's imports of alumina at 642,000 tonnes were the highest monthly total since May 2012.
It's going to be more difficult for China's NPI sector to switch nickel ore suppliers. The only other major source of ore is the Philippines, which produces lower-grade material with higher iron content, a mix that has significant cost implications.
Here China may be more likely to bide its time until nickel pig iron plants are constructed in Indonesia.
It's worth noting that one of the few companies to have received an export licence since Jan. 12 is PT Indoferro, the country's first NPI producer.
DISLOCATION AND TENSION
China's imports of refined copper came in at 379,000 tonnes, the second-highest monthly total after December 2011.
Imports of copper concentrates fell just short of the previous month's record of 1.040 million tonnes, while those of anode were a fresh record at 80,000 tonnes.
New Year considerations are almost certainly in the mix, both in terms of (Western) calendar term shipments and Chinese holidays.
But January's figures conform with the step-change in refined metal import volumes evident since the third quarter of last year. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's refined copper trade: link.reuters.com/zek27v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
A core driver has been the use of imported copper as collateral for raising loans.
The outcome has been a steady build in Chinese stocks of copper. Those registered with the Shanghai Futures Exchange (SHFE) <0#SCF-TOTAL-DW> jumped by 13,770 tonnes last week and at a current 194,111 tonnes are the highest they've been since Q2 2013.
The less visible mountain of metal sitting in Shanghai's bonded warehouse zone has also been rebuilding. Analysts at Barclays Capital, for example, suggest a 75,000-tonne increase to around 600,000 tonnes over the month of January.
While China is feasting on copper, the rest of the world is in a state of famine, causing front-month tightness on both the London Metal Exchange (LME) and COMEX contracts.
Despite backwardation across the front part of the LME curve CMCU0-3, Chinese exports last month were subdued at 26,000 tonnes.
The clear inference is that a greater incentive in the form of still tighter spreads is going to be needed to rebalance global stocks distribution.
THE COLLATERAL TRADE SPREADS
The use of metals for collateral financing appears to be spreading beyond copper, perhaps because of the Chinese authorities' increased scrutiny of what has been going on in that particular sector.
Zinc is the main beneficiary.
January's net imports of 90,000 tonnes were the highest monthly total since March-May 2009, when the Chinese government inadvertently flung open the arbitrage window by buying up domestic production at above-market prices, a sop to struggling local producers.
Right now, though, zinc is flowing into China despite an import-negative arbitrage.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on China's refined zinc imports: link.reuters.com/suk27v ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The inference is that zinc "imports" are probably going no further than Shanghai's bonded warehouse zone, where they are forming a second mountain of metal to complement the existing copper one.
There is less tension in the global zinc market than in copper because of higher legacy stocks but tension there still is. The LME cash-to-three-months period is in backwardation as visible inventory steadily leaves the LME warehouse system. Some of it, whether directly or by displacement, is evidently headed to China.
More spooked by the spreading appetite for collateral financing is the iron ore market.
January's imports of the steel-making input were also a fresh record at 86.83 million tonnes.
Notwithstanding continued high demand in China, port stocks of iron ore have hit their own record high of just over 100 million tonnes, according to figures SH-TOT-IRONINV from consultancy Steelhome.
Some commentators, such as Macquarie Bank, are taking a sanguine view of this development, arguing that expressed in terms of rising imports, port stocks are still relatively low. ("Iron Ore, Understanding the Indicators", Feb. 20, 2013)
However, if iron ore is being used as collateral, it comes with heightened price volatility risk.
This is a market that has seen periodic violent spasms resulting from credit squeezes along China's steel supply chain. The build in port stocks adds an extra dimension to the potential for another distress destock such as seen in Q3 2012.
Iron ore producers may have to learn the lesson already instilled in the copper market that booming Chinese imports are not always a straight bullish positive for price. (Editing by David Evans)