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Chinese Copper Imports May be Rising Defying Market Belief

Chinese copper imports may be rising defying market belief

Detailed analysis of Chinese import statistics suggest that all is not what they have been believed and imports of copper are stronger than the market has suggested.

The strength of Chinese copper imports in November seems to have defied market expectations, for the second month running.

However, the arbitrage between Shanghai and London remained positive for imports last month and that is still the case this month.

Moreover, China's continued appetite for refined copper suggests a more complex dynamic than the simplistic "doom and gloom" view of events in the local market.

IMPORTS ACCELERATE

The first snapshot of China's trade figures in November suggested that refined copper imports actually fell month-on-month.

The preliminary report aggregates imports of refined metal, alloy, anode and products. November's 217,214 tonnes were 6.0 percent off the pace of October.

However, the second, more detailed breakdown of November trade showed that the decline overly reflected a sharp fall in imports of copper products, which fell to 58,618 tonnes in November from 74,900 tonnes in October.
 

Imports of refined metal, alloy and anode were 158,600 tonnes and, assuming that monthly trade in alloy and anode didn't deviate too far from the average rate of the previous 10 months, imports of refined metal alone were probably around 138,000 tonnes.

If this figure proves to be correct it will be the highest monthly total so far in 2008.

How do we square such strong copper imports with accumulating evidence of a sharp slowdown in Chinese manufacturing output?

WINDOW STILL OPEN

The mechanics of continued robust inflows of refined copper to China are relatively straightforward.

Shanghai spot copper traded at a premium to London during much of November, keeping the arbitrage window open.

That will have encouraged opportunistic flows of metal into China. Many local players view an import-friendly arbitrage as nothing much more than a fast way of raising cash in dollars.

Such players will continue to capitalise on the London-Shanghai differential as long as it exists, which it still does. Unlike the London Metal Exchange (LME contract, which is in contango, the Shanghai Futures Exchange (SHFE) nearby copper curve remains heavily backwardated, keeping spot prices higher than LME prices.

The backwardation, in turn, is a result of depleted SHFE stocks. At 16,297 tonnes they are still very low by historical standards. The SHFE's recent volatility, resulting in short positions being prematurely closed out on a couple of occasions, has disrupted the functioning of the market and probably acted to hinder a sustained stock rebuild.

As such, SHFE stocks may not be as good a barometer of the overall stocks picture in China as desired.

That said though, there is little anecdotal evidence of the sort of off-market stocks build that is plaguing the Chinese zinc and aluminium sectors right now.

FALLING PRODUCTION

Mitigating against a sizeable build in Chinese stocks of copper has been the recent trend in domestic production of the red metal.  Official figures for November showed national production of refined copper rising to a five-month high of 330,200 tonnes.

However, behind the headline figure was a continuation of the recent weak trend in national production. November output was below the year-earlier level for the second consecutive month and for the third time in the last four reported months -- August through November.

Cumulative production growth slowed to just 9.6 percent, after running at closer to 20 percent in the second quarter.

That's a sharp slowdown. Growth is now at multi-year lows and it shows every sign of decelerating further, particularly with smelters caught in the vice of low prices for their product and the high cost of imported raw materials.

China, remember, is highly dependent on imports of copper concentrate to produce refined metal. Although spot concentrate terms have moved in the smelters' favour over the last couple of months, preliminary talks with international miners on 2009 terms have got nowhere, the smelters balking at what they view as an aggressive stance by the other side.

COMPLEX CONSUMPTION

Moreover, although there is no doubt that Chinese economic growth is slowing rapidly enough to cause serious concern to Beijing, it is by no means a uniform picture.

Firstly, there are big differences between specific copper-industry sectors. Any sector dependent on exports is suffering, but those, such as power cable manufacturers, which are more dependent on the domestic market, are said by locals to be buying copper against future orders.

Beijing's accelerated stimulus package, boosting infrastructure spending, will likely accentuate this divergence in the coming months.

Secondly, the Chinese industrial sector has not yet fallen off the cliff in quite the same way as has happened in most of the developed world.

Headline industrial production growth fell to 5.4 percent year-on-year in November from 8.2 percent. But UK analysts CHR Metals make the useful point that seasonally adjusting the figures shows that output actually grew by 1.1 percent in November after plunging by 4.6 percent in October.

"There may well be some sleight of hand in the presentation of the headline IP data but we take some heart from the fact that October's panic, which prompted severe cuts across a range of industries, did not herald even more drastic cutbacks in November," CHR said in its most recent "Global IP Watch".

That's not to understate the problems facing either the Chinese(cnmining) economy as a whole or the local copper sector specifically, but it is to emphasise that there is still an element of resilience on the consumption side, which will be a net positive until the impact of the government's stimulus package kicks in next year.

In short, China's refined copper imports look set to remain more robust in the very short term than widely expected and there are solid reasons for believing that we are not seeing a one-dimensional relocation of surplus metal from the international to the Chinese market place.

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