There is a great deal of hype about China at the moment. Nothing new there then you may say, but this recent article in Energy & Resources apparently reproducing a Reuters article deserves some comment. Not that we dispute the numbers but rather the interpretation one should put on them. The essence of the article is that copper prices and demand are up because China is buying all the available metal as a result of the Chinese stimulus package.
Well China is buying metal that’s true, but the stimulus package is only a small part of the story. A large part of the volumes purchased have been by the State Reserve Bureau, in excess of 600,000 tons and possibly up to 1,000,000 tons depending on who’s numbers you believe. This has removed metal from the local market as well sucking in imports. As domestic metal has become more scarce, the Shanghai Futures Exchange premium over the LME has widened encouraging traders and consumers to switch to imports as opposed to domestic supply sources. In addition, domestic consumers have found scrap hard to find due to the low copper price and so have switched to importing primary metal further boosting the figures. All this presents a picture of dramatically rising demand when in reality what we are seeing is temporary demand due to SRB purchases, a switch from scrap to primary, a degree of consumer re-stocking at lower prices and speculative imports by traders and consumers keen to mitigate the rise in the SHFE.
We are not seeing a return of the China bull market. China has almost as many problems as the US and Europe and China’s salvation will largely be an improvement in the fortunes of those markets not in a domestic demand brought on by repackaged stimulus programs. So while we are as keen as everyone for some good news, let’s maintain a degree of balance, this surge in import numbers requires some deeper analysis if it is not to be misinterpreted as a surge in industrial growth.