China continued to pump refined copper out into the international market last month to the tune of 57,000 tonnes.
Cumulative exports so far this year now total 335,000 tonnes, already exceeding any previous calendar year.
To be sure, the country is still absorbing more refined copper than it is exporting. But it is increasingly clear that the acceleration in outbound flows which started in the second quarter is not a statistical blip.
And with the copper market full of talk about further large inflows of metal into London Metal Exchange (LME) warehouses, the question is whether Chinese exports, once something of a rarity, are becoming the new normal.
Graphic on China’s refined copper trade:
Graphic on China’s copper raw materials trade:
SOAKING UP SURPLUS
Underpinning the changed dynamics of China’s trade in refined copper are even more significant shifts in the country’s copper raw materials trade.
Net imports of 175,000 tonnes of refined metal in August were the lowest monthly read in over three years.
But imports of copper concentrates at 1.45 million tonnes (bulk weight, not metal contained) were the third highest on record, eclipsed only in December last year and February this year.
Cumulative imports of copper concentrates have risen by a staggering 34 percent to 10.86 million tonnes so far this year.
This is what that much-talked-about copper surplus looks like.
Global production of copper concentrates rose by six percent in the first half of this, according to the International Copper Study Group (ICSG).
And much of that extra material is flowing into China because that’s where much of the world’s available smelter and refinery capacity is located.
Citi analyst David Wilson argues that “high levels of capacity (and capacity additions) and low utilization rates make China the only location with sizeable spare capacity to be able to process new concentrates coming from Peru in particular.” (“Copper – Taking stock of shifting inventory trends”, Sep. 20, 2016)
Peruvian copper production is currently surging, up 51.5 percent in the first half of 2016. So too are Chinese imports of concentrates from the Latin American country, up 95 percent year-on-year in the January-August period.
The flip side to this raw materials boom is a continuing decline in Chinese imports of copper scrap.
The country’s smelters simply don’t need as much because they can feast on concentrates surplus.
THE TOLLING BUSINESS
This abundance of raw material is driving Chinese refined copper production ever upwards.
Output totaled 743,000 tonnes in August, representing a 12.4 percent increase on last year. Year-to-date production is 5.50 million tonnes, up 8.7 percent, running far ahead of the ICSG’s global output growth assessment of 2.5 percent.
And more metal is seeping out of the country because more Chinese smelters are getting involved in the tolling business, converting raw materials into metal for traders, according to Citi’s Wilson.
In doing so they avoid both the 17-percent VAT hit on concentrate imports and the 15-percent tax hit on refined metal exports.
As such, a tolling smelter in China is the same as a tolling smelter anywhere else in the world except for its physical location.
And like tolling smelters anywhere else, the key determinant of where a Chinese smelter ships its metal is price.
If it’s more profitable to ship to LME warehouses in easily accessible ports such as those in South Korea, Singapore and Taiwan, that’s where the metal will go.
Earlier this year, the LME incentive came in the form of a persistent premium for cash metal due to depleted exchange inventory.
More recently, it has taken the form of warehouse incentives, which according to Citi, reached $65 per tonne in June, even as the Chinese premium itself was languishing below $50 per tonne.
Shanghai premiums have since risen to $55-60 over LME cash, according to LME ring-dealing broker Triland Metals.
That may be why the pace of copper inflows at LME Asian locations has slowed this month.
The three good-delivery ports in South Korea have seen fresh warranting activity drop to 17,200 tonnes from 88,325 tonnes in August.
Arrivals at Singapore have tailed off to 6,000 tonnes so far this month from 36,650 tonnes in August, while the tally at the Taiwanese port of Kaohsiung has dropped to 2,000 tonnes from 6,300 tonnes.
It seems highly likely that September’s trade figures are going to show a slowdown in Chinese exports to these countries.
Faced with a diminishing incentive to ship to the LME warehouse system, tolling smelters can simply divert metal into China’s own bonded warehouses. For tax purposes such movement still counts as an export.
And, rather confusingly, such metal counts as an import if it moves back into the mainland.
The fourth largest supplier refined copper imports to China in August, for example, was, er, China with 18,321 tonnes.
More Chinese smelters playing the fine-margin economics of tolling concentrates is probably going to add an extra level of complexity to China’s copper trade.
One determined by physical premiums and warehouse incentives as much as underlying London-Shanghai arbitrage mechanics.
Flows will therefore not be consistent as operators and their merchant partners capitalize on short-term shifts in profitability drivers.
Those drivers seem to be shifting away from LME delivery back towards Chinese bonded warehouse delivery right now, promising some let-up in export flows, although how significant remains to be seen.
However, the key takeaway is that China’s build-out of smelter and refinery capacity means the country can, if the conditions are right, export large amounts of refined copper.
Just how large we are seeing this year.
That export capability is the new normal, even if it doesn’t necessarily translate into continuous high exports.
(The opinions expressed here are those of the author, a columnist for Reuters.)
(Editing by William Hardy)