LONDON (Reuters) - China exported 85,000 tons of refined copper in May. It was the second highest monthly outflow on record, eclipsed only by the 102,000 tons that left the country in May 2012.
The copper market, which is more accustomed to tracking what goes into China, the world’s largest single consumer of the stuff, is now fretting that more, maybe much more, may be on its way.
Particularly given the flood of metal into London Metal Exchange (LME) warehouses at key Asian locations such as Singapore and South Korea at the start of June.
Such concerns are understandable.
The strength of imports over the first part of the year was surprising, given accumulating evidence of stuttering manufacturing demand in China.
With domestic production also rising strongly, up seven percent year-on-year in May, and the seasonal summer lull in fabricating activity fast approaching, it is tempting to view last month’s export surge as a warning sign that the Chinese market is saturated.
However, May’s highly unusual copper flows may say as much about the London copper market as about that in China.
Graphic on Chinese copper exports by destination 2015:
Graphic on Chinese exports by destination 2016:
It’s easy to forget that China has for several years been a consistent exporter of refined copper, even if what leaves is dwarfed by what enters the country.
Although there is a 15-percent export duty on refined copper, some of the country’s largest producers qualify for a VAT rebate on some of their output.
Exports last year totaled 211,600 tons. The top three destinations were Taiwan (72,100 tons), Malaysia (38,400 tons) and Vietnam (24,500 tons).
The pace of exports in the first four months of this year was actually down on the year-earlier period to the tune of seven percent, or just under 6,000 tonnes.
Some sort of acceleration always looked likely.
Both visible stocks on the Shanghai Futures Exchange (ShFE) and darker inventory held in Chinese bonded warehouses grew significantly over the first quarter.
Physical premiums for bonded metal slumped below $50 per ton over LME cash at one stage in early April. Critically, that was less than the level of incentives being offered by some LME warehouse operators.
For those smelters entitled to a tax rebate, exporting metal was something of a no-brainer.
Graphic on Chinese exports vs LME arrivals:
However, the amount of metal arriving in the LME system earlier this month reflected more than just “normal” Chinese exports.
A total 65,550 tons were warranted over the course of just four days (June 3, June 6, June 7 and June 8) in what bore all the hallmarks of a coordinated delivery by one party.
The backdrop was tightness in the LME spreads and a dominant position holder with cumulative stocks and cash positions representing over 90 percent of available LME inventory.
By the end of the week that position had been diluted and the cash premium over three-month metal was wiped out. The time-spread moved from a backwardation of $27 per ton at the end of May to a contango of $14 at the close of Friday, June 10.
The deliveries were concentrated on Singapore, where LME warehouses received 39,650 tons, although there was also significant warranting activity at South Korean locations (18,250 tons) and Kaohsiung in Taiwan (3,850 tons).
Interestingly, Singapore has seen the closest match between Chinese exports and LME arrivals over the last couple of months, which seems to imply that at least some of the metal mass warranted earlier this month had come from stocks sitting in bonded warehouses at Chinese ports.
It’s a quirk of Chinese customs that both what goes into bonded warehouses and what comes out again are counted as “imports” and “exports” even though no import duty is payable until the metal enters the mainland.
All the available evidence, in other words, suggests that “normal” export flows were significantly accelerated by the movement of metal to be delivered against LME short positions.
So is the market right to be worried about the potential for more exports and higher deliveries onto LME warrant?
There is still plenty of chatter on the “LME Street” that the party behind this month’s earlier flurry of warranting activity may have more to do.
Even though the current looser structure of the LME spreads has taken the pressure off all short position-holders. The cash-to-three-month period ended Tuesday valued at $11.25 per ton contango.
Moreover, the “normal” export flow can be expected to continue as long as the arbitrage is right.
On the other side of the equation, however, is the combination of continued strong outright imports into China and signs that the domestic market is starting to work off its previous glut.
Although all the market focus has been on the strength of copper exports last month, China’s imports were also still highly robust.
The figures tell their own story.
China has imported 1.77 million tons of refined copper so far this year, representing year-on-year growth of 24 percent, or an extra 348,000 tons.
Even with May’s high exports, net imports of 1.61 million tons are also up by 22 percent, or an extra 293,000 tons.
Yet ShFE stocks are now falling again. After mushrooming by 200,000 tons over the first quarter of the year, duty-paid stocks have fallen by almost the same amount over the second quarter.
While the front part of the LME curve has flipped to contango, that on the Shanghai market has tightened up to level or small backwardation.
Physical premiums for copper in the Shanghai bonded warehouse zone have edged back up to $50 per ton bid, according to LME broker Triland Metals.
All of which suggests that the broader rebalancing of stocks from a glutted Chinese to a depleted London market may have run its course.
The wild card, however, remains the LME spreads. Is the long-short battle over or do easier spreads mark only a temporary cease fire?
That may yet turn out to as powerful a driver of Chinese exports as the state of the Chinese copper market.
Editing by William Hardy
Our Standards: The Thomson Reuters Trust Principles.