AFX: METALS INSIDER: China remains in copper restocking mode
If the copper market's disappointed reaction were anything to go by, you'd be forgiven for thinking that China's copper imports almost evaporated in January.
However, there were plenty of mitigating factors in the headline 18.8 percent month-on-month drop in imports of the red metal last month.
Indeed, looked at from a broader perspective, the country remained in full restocking mode for the fifth consecutive month.
The implications are twofold.
Firstly, the flow of metal to China is preventing an even bigger build in visible surplus than we're currently seeing.
Secondly, the Chinese stocking cycle has in recent years defined both the bottom and the top of the copper market. Will it do so again this time ?
JANUARY IN CONTEXT
The first snapshot of January's copper imports aggregated trade in refined copper, copper alloy, copper anode and copper products. The total was 232,701 tonnes.
Sure, that represented a sharp 19 percent drop from December's level but remember that imports of 286,600 tonnes in the prior month had been at a record all-time high.
Year-on-year January's copper imports were down by a much more marginal 2.7 percent, a drop that may be explicable by the timing of the Lunar New Year holidays-January this year, February in 2008.
However, more important than any individual month's level of copper imports is the broader trend.
This is shown in the chart below, which tracks China's refined copper imports over the last five years. January's imports of refined copper only (i.e. without anode, alloy or products) are estimated at 130,000 tonnes.
In this context January marked the fifth consecutive month of stronger imports, off December's peak but still much higher than levels seen over the middle of last year.
Imports in Sep 08-Jan 09 totalled around 725,000 tonnes. In the prior five-month period they were only 475,000 tonnes, a difference of 250,000 tonnes.
RESTOCKING
The closest historical comparison to the Sep 08-Jan 09 period is Jan-Jun 2007, when imports totalled almost 900,000 tonnes.
With the benefits of hindsight we now know that a major Chinese restocking exercise took place in the first half of 2007, stimulated by an open arbitrage window and the pull-back in outright LME copper prices to a mini-cycle low of $5,250 per tonne.
Something very similar seems to be happening this time around.
Once again the arbitrage window is wide open. LME prices have fallen even further than in 2007 in the wake of the global financial carnage of late 2008. And metal is flooding into China.
So far very little of the import surge has found its way into warehouses operated by the Shanghai Futures Exchange.
Exchange stocks at 33,881 tonnes have rebuilt slightly this year but are still very low by any historical yardstick.
Chinese manufacturing activity has braked sharply since September, meaning most of the metal flying through Chinese customs is not going to feed miraculously immune copper consumption but into stocks build, primarily commercial and only more recently government.
The government stockpile manager, the State Reserve Bureau (SRB) has swung into action, both in the domestic and overseas markets, only in the last couple of weeks having failed to buy copper from major local producers in January.
Government buying may very well extend the current restocking phase but it was not the instigator. That was China Copper Inc, the collective commercial sector, taking advantage of cycle-low prices.
CALLING THE BOTTOM ?
Purists can quite justifiably point out that such "buying" is not buying at all, merely a displacement of surplus from one place to another.
It does not in itself mean that Chinese copper consumption is defying the recent sharp economic slowdown in the country.
What it does do, however, is mitigate the build in visible surplus, particularly that represented by the LME warehouse system.
Moreover, those who restock, whether they be government officials, traders or manufacturers, tend to do so for the same reason, namely a belief that prices are not going to go a lot lower in the short term and will rise over the medium term.
China, it seems, is collectively calling the bottom of the copper market, just as it did in early 2007. The scale of the buying back then sucked surplus metal out of the system, paving the way for prices to rescale the heights above $8,000 per tonne.
This time around there's a lot more surplus and it's likely to grow further as global demand is still contracting, which makes trying to call the bottom of the current price cycle much more perilous than in 2007.
However, China has more buying to do now than then, particularly the SRB, which is said to be in the market for up to 700,000 tonnes of metal over the coming months.
China is also likely to see a recovery in demand before just about anywhere else in the world thanks to the Chinese government's hardened resolve to kick-start its slowing economy.
China Copper Inc. is taking Beijing at its word. If its optimism is misplaced, there's going to be a lot of unsold copper inventory lying around in China which will come back to haunt the market.
But then again, China Copper Inc. will likely determine how fast and how quickly global copper consumption recovers just as Chinese economic growth will help define the severity of the global recession.
