Macquarie Bank: Imports likely to stay subdued

Staff -- Purchasing, 10/7/2004

The continuing large discount between Shanghai Futures Ex-change copper prices and import prices in China suggests the country's net imports of copper are likely to remain subdued for some time, reckon Macquarie Bank analysts in Sydney, Australia.

"The discount between import prices and Shanghai prices is not nearly as large in June or July as in April and May," says the bank, "suggesting that the worst hit on imports is past." However, "the data is certainly not indicating that China is ready to return to being the massive net importer of copper we have become used to over the past two years."

While London Metal Exchange copper prices have been on the rise over the past month, Shanghai Futures Exchange ( SHFE ) prices have been relatively flat. Meanwhile, China's net imports of refined copper tumbled to just 32,000 tons in May from 125,000 metric tons in April, Macquarie says. Based on total unwrought import and export data, which is all that has been released so far, the bank estimates that refined metal net imports totaled about 59,000 tons in June.

"The recent pattern in the Shanghai/LME price differential would appear to suggest that July net imports could be slightly higher than in June, perhaps 80,000 tons, but that August net imports could be lower again," the bank's analysis suggests. Because apparent consumption of copper has fallen more rapidly than most other Chinese indicators, Macquarie believes there has been "extremely heavy destocking."

Still, "Chinese copper prices suggest that this process still has some way to go yet." Note that when benchmark three-month (October-delivery) LME copper was quoted in mid-July at $1.29/lb, the most active (November) SHFE contract was $1.43/lb.

Meanwhile, the domestic Chinese aluminum market is looking heavily oversupplied in its own right, as evidenced by that latest SHFE pricing action, Macquarie says. "While LME aluminum prices have been rising since mid-May, Shanghai prices have declined, leaving Chinese domestic prices at their biggest discount to import prices for as far back as we have been tracking the data," which is over five years, the bank says. Such a huge discount could mean that a sharp rise in Chinese aluminum exports is imminent, "if reports of a major Chinese producer selling from stocks are correct," the bank adds.

Pressure to accelerate aluminum exports in the near term could also stem from ongoing speculation that the Chinese government will soon move to eliminate the 8% value added tax rebate on exports, and possibly even impose a new 5% export tax, Macquarie says. "We would, however, expect any surge in exports to be fairly short-lived—particularly if rebates are cut or export taxes are imposed," the bank suggests.

"Chinese aluminum production growth is expected to slow, particularly with the planned closure of all Soderberg-process smelting capacity by the end of this year, and as long as demand does not collapse, this should mean a shrinking exportable surplus later in the year," Macquarie adds. Note: When three-month LME aluminum was being quoted at 79¢ the most active November SHFE contract was 80¢.