Has China’s base metals import appetite peaked?
Not so very long ago base metals bulls marched to the beat of the monthly release of China's trade figures.
The country's import appetite was seemingly insatiable as it sucked in ever-increasing volumes to feed its booming infrastructure and property programmes.
Not any more, though.
Net imports of refined aluminium, nickel, zinc and tin all fell last year, some of them precipitously. China isn't a net importer of refined lead at all, a steady flow of exports helping explain why this particular market is so out of favour with investors right now.
Aluminium product exports are also booming, a tangible manifestation of oversupply in the Chinese market.
Only copper continues to buck the trend, although for how long is an increasingly moot question.
So is this fading import appetite another sign of what Prime Minister Li Keqiang has dubbed the "new normal" for the Chinese economy as it transitions to a less resource-intensive growth model?
Undoubtedly, that's part of the picture although, as ever with China, things are never quite that simple.
The Qingdao Effect
Last year's base metals trade patterns, for example, were heavily distorted by the Qingdao Effect.
The scandal over the alleged multi-pledging of metals in the port of Qingdao first came to light at the end of May. The shockwaves are still reverberating through the courts, but the impact on the whole metals financing business was both immediate and profound.
Net imports of aluminium and zinc, both of which had been used extensively as collateral for lending in China's shadow credit market, collapsed.
China imported 227,000 of primary aluminium in the first half of last year and just 40,000 tonnes in the second half.
Imports of refined zinc halved to 190,000 tonnes in the six months after Qingdao, while exports rose from 4,600 tonnes in January-June to 127,000 tonnes in July-December. China was actually a net exporter of non-alloyed zinc in the last quarter of 2014.
Nickel was the worst affected, however.
Exports surged as metal headed for safe-haven storage in the London Metal Exchange warehouse system.
It was a brutal wake-up call for the nickel market, which hadn't realised just how much of the stuff had been sitting in China's bonded warehouses. The country turned net exporter for the first time ever over the June-December period.
The refined nickel export flow showed signs of losing momentum in December and it's quite possible the country's net trade will reverse fully this year. China still needs nickel to feed its leviathan stainless steel sector and it will quite possibly need even more if its own nickel pig iron (NPI) output succumbs to an expected nickel ore shortage.
Whether aluminium and zinc imports will ever fully recover from the "Qingdao effect" is an altogether different question. After all, there is little evidence that the country actually needs to import either given its own growing metal production capacity.
Self Sufficiency
And that long-term shift towards self-sufficiency at the refined metal stage of the supply chain is another core driver of China's changing metals trade patterns.
The process is at its most advanced in aluminium. Not only can China produce enough metal and semi-manufactured products to meet even its stellar demand growth, it is actually over-producing.
The result is an accelerating seepage of surplus into the international market. The overflow is in the form of semi-manufactured products because these qualify for a tax rebate, by contrast with primary metal, which is subject to an outright export tax.
This is a long-running trend but December brought a sharp jump in semis exports to an all-time high of 490,000 tonnes.
That may prove to be an outlier month, though, given exporters may have been rushing to get ahead of potential changes in the tax regime, much rumoured but so far not confirmed.
Lead is another market characterised by Chinese oversupply. China has been a consistent net exporter since the start of 2013.
Indeed, net refined exports grew from 21,000 tonnes to 33,000 tonnes last year. It's not a large tonnage, but it might merely be the visible tip of a bigger outbound flow, if metal is leaving in forms that don't make it into the headline figures.
Raw Materials Appetite Grows
The flip side to this build-out of China's own processing capacity is a displacement of import demand up the supply chain to the raw materials needed to produce metal.
Imports of lead, zinc and copper concentrates all grew last year, the country's appetite for the latter whetted by a continued slowdown in imports of scrap copper.
That growing dependency on imported raw materials comes with its own problems.
Indonesia's January 2014 ban on the export of unprocessed minerals has caused major shifts in import patterns as Chinese buyers try to adjust.
In the case of aluminium, a collapse in imports of Indonesian bauxite has led both to new inbound flows from countries such as Malaysia and the Dominican Republic and increased imports of alumina, which sits between bauxite and primary metal in the production chain.
China's nickel pig iron producers, meanwhile, have tried to offset the loss of Indonesian nickel ore with Philippines material. Imports from the Philippines jumped by 23 percent to 36 million tonnes last year.
Analysts are still betting that this lower-quality ore is only delaying the inevitable, namely a sharp drop in Chinese NPI production.
A 45 percent jump in imports of ferronickel, a higher-quality alternative to NPI, may be a sign of what lies ahead for the Chinese nickel market.
Copper the Constant
The one apparent constant in this moving Chinese import picture is copper.
Net imports of refined copper carried on rising last year, up another 14 percent to hit yet another all-time high of 3.3 million tons.
This is all the more remarkable since copper was the most favored metal among financiers involved in the collateralized credit market.
But copper proved relatively unscathed by the Qingdao fall-out. Metal was moved to safer storage but it was moved within China rather than out of the country.
Exports of refined copper actually fell last year to the tune of 9 percent.
All of which appears anomalous in the broader pattern of falling refined metals imports and accelerated exports until you remember it is widely accepted that the government stockpile manager, the State Reserves Bureau (SRB), has been actively buying up metal.
The exact tonnages are uncertain but may well have been sufficient to account for the additional net 410,000 tonnes of refined copper imported in 2014.
The SRB buys copper because it is still viewed by Beijing as a strategic metal. And one of which the country is structurally short.
But even the copper constant may not prove totally immune to the combination of slowing economic growth and increasing refined metal self-sufficiency.
China's production of refined copper reached its own all-time high in December. No-one completely trusts the official figures but the trend is clearly upwards.
If it continues, the peak for refined imports of even copper may also be approaching. (Reuters)
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