Interpreting China's copper export surge
China exported 85,000 tonnes of refined copper in May. It was the second highest monthly outflow on record, eclipsed only by the 102,000 tonnes 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.
Is the long-short battle over or do easier spreads mark only a temporary cease fire? Photo: Martin Leissl
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 7 per cent year-on-year in May, and the seasonal Northern Hemisphere 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.
Exports not necessarily unusual
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-per cent 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 totalled 211,600 tonnes. The top three destinations were Taiwan (72,100 tonnes), Malaysia (38,400 tonnes) and Vietnam (24,500 tonnes).
The pace of exports in the first four months of this year was actually down on the year-earlier period to the tune of 7 per cent, or just under 6000 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 $US50 per tonne 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.
Short positioning moves?
However, the amount of metal arriving in the LME system earlier this month reflected more than just “normal” Chinese exports.
A total 65,550 tonnes 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 per cent 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 $US27 per tonne at the end of May to a contango of $US14 at the close of Friday, June 10.
The deliveries were concentrated on Singapore, where LME warehouses received 39,650 tonnes, although there was also significant warranting activity at South Korean locations (18,250 tonnes) and Kaohsiung in Taiwan (3850 tonnes).
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.
Physical premiums rebound
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 $US11.25 per tonne 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 tonnes of refined copper so far this year, representing year-on-year growth of 24 per cent, or an extra 348,000 tonnes.
Even with May’s high exports, net imports of 1.61 million tonnes are also up by 22 per cent, or an extra 293,000 tonnes.
Yet ShFE stocks are now falling again. After mushrooming by 200,000 tonnes 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 $US50 per tonne 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.