China's strong imports help explain low LME metal stock
If you're wondering why London Metal Exchange (LME) stocks of metals such as copper and zinc are so low, part of the answer lies with the current strength of Chinese imports.
LME copper stocks, excluding metal awaiting load-out, currently total a meagre 21,600 tonnes, the lowest since 2005.
There are just 52,650 tonnes of "live" LME zinc stocks, a level not seen this century.
Lead can be added to the list of disappearing visible inventory. After two consecutive days of heavy cancellation activity, "live" LME stocks have fallen to 44,150 tonnes, close to January's multi-year low of 40,775 tonnes.
There are just 52,650 tonnes of "live" LME zinc stocks, a level not seen this century
Each metal has its own narrative, particularly copper, where low LME inventory seems part of a concerted play to squeeze nearby timespreads.
But in each case refined metal has been flowing in significant quantities to China, reducing availability in the rest of the world. That trend continued into January.
China imported a record amount of refined copper last year, 3.75 million tonnes, and the country's appetite showed no signs of diminishing in January.
Last month's imports totalled 336,680 tonnes, up 7 percent year-on-year, according to Refinitiv, which sources its figures from the Chinese customs department's new website.
The country also continues to import huge amounts of copper concentrates. Last year's tally of 19.7 million tonnes, bulk weight, was a fresh annual high and January's imports of 1.9 million tonnes were up another 18 percent year-on-year.
This isn't particularly surprising given last year's strong global copper mine performance and several smelter outages which have freed up material for Chinese buyers.
China imported a record amount of refined copper last year, 3.75 million tonnes
The combination of strong imports of copper in both concentrates and refined form is more anomalous. Higher concentrates imports should mean higher domestic production, reducing the need for imports of metal in refined form.
Part of the answer to that conundrum comes from the decline in imports of scrap. These fell 32 percent last year and slid another 12 percent to 176,900 tonnes in January.
The drop in the headline bulk tonnage figure masks a sharp rise in purity as China shuts the door on lower-quality scrap. But the ongoing disruption to copper scrap flows, particularly from the United States, is translating into higher demand for imported refined copper.
Lower scrap imports are going to remain a feature of China's copper dynamic this year with the government planning another tightening of the purity rules.
However, the current pace of refined copper imports looks increasingly unsustainable.
Stocks of copper registered with the Shanghai Futures Exchange have almost doubled since the start of January and now total 217,794 tonnes. Physical premiums for Chinese delivery are bombed out at $48 per tonne, also suggesting the local market is saturated.
Given the low inventory in the LME system and the resulting tightening of LME timespreads, there is rising potential for a pick-up in Chinese exports from their current subdued levels of under 30,000 tonnes per month.
China imported just under 70,000 tonnes of refined zinc in January.
That was slightly off the pace of the preceding quarter but, as with copper, marked a continuation of a strong underlying trend, which saw refined zinc imports hit a record 713,355 tonnes in 2018.
China has turned to the international market-place to compensate for its own falling production.
The country's national output of refined zinc slid 4.6 percent last year, according to state research house Antaike.
Chinese smelters have been caught between a tight concentrates market and an escalation of environmental regulations.
Raw materials tightness should ease this year as mine supply surges, although January's concentrates import figure of 301,400 tonnes was still 11 percent off last year's pace.
The key question is whether Chinese zinc smelters can actually process more concentrates, given many are scrambling to comply with new solid-waste emissions regulations.
Analysts at Citi expect domestic production to rise due to smelter restarts after the Lunar New Year holidays but the flow-through to refined metal availability will take time, meaning the bank is looking for refined imports to remain robust through the first half of 2019. ("China Commodities Trade Data", Feb. 27, 2019)
Everything, however, hinges on whether the environmental crackdown on zinc smelting in China intensifies further.
China flipped from net exporter to net importer of refined lead in 2017 and last year's imports surged 64 percent to 128,127 tonnes, the highest level since 2009.
This accelerated flow of metal into China rolled over into January with imports totalling 25,800 tonnes.
That was marginally off the pace of both November and December 2018 but imports in those two months marked 10-year highs.
Export flows, meanwhile, have almost dried up completely with just 295 tonnes of outbound shipments in January.
As with zinc the elevated call on units from outside China appears to reflect domestic supply weakness in both the primary and secondary (scrap) production streams.
Analysts at Refinitiv estimate that China's own lead production fell by 2.2 percent last year on a combination of reduced concentrates availability and ongoing reform of the fragmented secondary sector.
January's concentrates imports were 122,725 tonnes, the highest monthly tally since September last year.
After three consecutive years of decline, lead raw materials inflows should pick up as mine supply recovers in tandem with sister metal zinc this year.
However, after three years of thrifting, China's lead smelters are getting more creative with their input mix, blending concentrates with recycled lead paste, according to Refinitiv.
That may place a structural cap on how much concentrate the country needs going forwards.
Right now, though, historically high imports of refined lead point to continuing supply-chain tensions within the Chinese lead market.
(By Andy Home; Editing by David Evans)