(The opinions expressed are those of the author, a columnist for Reuters)
* Graphic on China's trade in refined copper: tmsnrt.rs/2oMfYOy
* Graphic on China's imports of copper scrap and concentrate: tmsnrt.rs/2qaPqex
By Andy Home
LONDON, April 27 (Reuters) - China’s imports of refined copper slumped by 28 percent year-on-year in the first quarter of 2017.
Factoring in exports, now a regular feature of the country’s trade picture, the slide in net metal imports was an even more dramatic 35 percent.
The net draw on units from the rest of the world was 699,000 tonnes in the first three months of the year, a decline of 368,000 tonnes on the same period of 2016.
Look no further to understand why copper’s early-year bull run to over $6,200-per tonne, basis three-month metal on the London Metal Exchange, has stalled. The price is today trading around $5,720.
Even while production disruptions have accumulated, any impact on refined metal availability has been muted, witness the near 185,000-tonne build in global exchange stocks in the first quarter.
However, it’s not as if China has lost its appetite for imported copper.
It’s just that it has shifted to other forms of the metal.
Graphic on China’s trade in refined copper:
Graphic on China’s imports of copper scrap and concentrate:
First and foremost copper scrap.
Imports of scrap seemed to be in long-term decline having fallen in each of the last four years.
Volumes last year were 3.35 million tonnes (bulk weight, not metal contained), compared with 4.86 million tonnes in 2012.
That steady downtrend, however, has gone into sharp reverse over the last few months.
Imports accelerated by 22 percent to 907,000 tonnes in January-March, the highest first-quarter level since 2013.
This is part and parcel of what seems to be a global surge in scrap supply occasioned by the sharp jump in the copper price from under $5,000 in the fourth quarter of last year.
This is how large parts of the scrap sector “hedge” their price exposure. When the price falls, sales of material bought at higher prices simply dry up. Accumulated stocks are only released when the price rises to a sufficient level to make them profitable again.
Discounts for copper scrap in both the United States and Europe have flexed wider since the fourth quarter of last year, attesting to much improved availability.
It’s no surprise, therefore, to see the world’s largest buyer of copper soak up this cheaper source of metal.
The scrap import surge is a recent phenomenon.
The rise in mined concentrate imports is part of a longer-running trend rooted in China’s build-out of refining capacity.
Imports of concentrates have risen every year since 2011 with the pace accelerating in 2016 thanks to much-improved mine supply.
And the trend was extended in the first quarter with inbound flows of concentrate rising another 8.5 percent to 4.31 million tonnes (bulk weight).
True, there is clear evidence of the supply hits at Freeport McMoRan’s Grasberg mine in Indonesia and at BHP Billiton’s Escondida mine in Chile.
Imports of concentrate from Indonesia almost dried up completely in March itself with the first quarter tally of 66,100 tonnes down by a third on last year’s equivalent.
Those from Chile, meanwhile, grew by just three percent in the period after growth of 27 percent last year and the country was overtaken by Peru as China’s top supplier of mined concentrates.
But compensation came in particular from sharp jumps in imports from Spain and Kazakhstan, China’s sixth and seventh largest volume suppliers in the first quarter.
Concentrate imports in March itself were 1.63 million tonnes, still the third highest monthly total on record after November and December 2016.
The steady rise in China’s appetite for imported copper concentrates is part of a long-running trend and one which will serve eventually to dampen the country’s requirement for imports of refined metal.
However, it’s clear that the short-term weakness in refined metal imports owes more to the turnaround in availability of copper scrap.
Scrap impacts the supply chain in two ways, both negative for refined metal demand.
Firstly, greater scrap supply means higher production of refined copper by those refineries capable of handling it as a raw material feed.
The International Copper Study Group (ICSG) estimates that global production of refined copper rose by around two percent in January. Production using concentrates as a feed was flat, while production from scrap rose by 13 percent year-on-year.
“Increased availability of scrap allowed world secondary refined production to increase, notably in China where the upward trend started in 4th quarter 2016,” the Group said in its most recent monthly update.
Secondly, and perhaps even more importantly, the combination of improved supply and cheaper pricing incentivises many product manufacturers to increase scrap in their input mix, reducing the need for refined copper.
The resulting softness in refined metal import demand is being compounded by continued robust “exports” of copper. These come from a clutch of producers permissioned to toll-treat raw materials and export refined copper without paying the 15-percent export tax.
The first-quarter export tally was 105,000 tonnes, compared with just 43,000 tonnes in the same period of 2016.
Not all of these “exports” necessarily leave the country. China’s customs department counts a shipment as an export even if the metal only goes as far as a bonded warehouse zone in one of the country’s ports.
At times last year there seemed to be a fairly clear linkage between China’s outbound flows and arrivals at LME warehouses in Asia.
The picture has become much murkier with the most recent high-volume deliveries into the LME’s Asian network taking place at Singapore, to which China has exported only a modest 5,000 tonnes so far this year.
A long-running theme of China’s trade in copper is that it often says as much about supply as it does about the country’s underlying demand.
The emergence of scrap as a significant supply source is accentuating that theme at the moment.
However, it will not last. By its very nature this sort of price-related destock of scrap is a one-off phenomenon and most copper analysts are looking for a steady diminution over the coming months.
To what extent that translates into a recovery in refined copper imports by China remains to be seen.
Much will depend on the state of play in the concentrates part of the supply chain.
Mine supply has taken some big hits in the early months of this year but it has evidently not yet impacted China’s ability to make more refined copper itself. Production was up by 8.5 percent in March and not all of that increase is attributable to scrap.
Smelters have probably been drawing on stocks accumulated last year in what turned out to be a boom year for mine production.
They, like everyone else in the copper market, will be paying close attention to what happens with mine supply over the rest of this year.
Editing by David Evans