FOCUS: China Diversification Into Metals From Dlr Unlikely
online.wsj.com
By Andrea Hotter
Of DOW JONES NEWSWIRES
LONDON (Dow Jones)--A recent surge in copper demand is likely to be the result of China's severe shortage of scrap, rather than a program to reduce its dollar holdings by diversifying into metals, as suggested by a U.K. newspaper report.
Chinese copper imports in March jumped 56% year-on-year, helping LME copper prices to rise some 69% since December. The Daily Telegraph Thursday attributed the rise in imports to the country's efforts to diversify its dollar holdings by buying and stockpiling physical metals, including copper, for future consumption.
But such a program wouldn't make much of a dent in China's massive currency reserves. Total base metal and steel stocks held on warrant in London Metal Exchange warehouses are worth just over $10 billion, according to LME ring dealer RBS Sempra Commodities and based on Thursday's closing settlement prices.
This is just a drop in the ocean for China, whose total foreign exchange reserves are some $1.954 trillion, according to the central bank. Analysts estimate as much as much as 70% of this is in dollar-denominated assets, including U.S. Treasuries.
Commerce Ministry spokesman Yao Jian said this week that China's foreign-exchange reserves are likely to remain stable.
No one at China's Strategic Reserve Bureau was available for comment.
Analysts say the spurt in Chinese copper imports in March, to 374,957 metric tons from 240,634 tons a year earlier, is the result of a need to seek alternatives to scrap.
When more scrap becomes available, both domestically and internationally, Chinese buying is likely to wane, with copper prices falling as a result.
"A genuine shortage of scrap availability has resulted in a much-increased demand for refined metal," said Standard Bank analyst Leon Westgate, based in London.
The business downturn has led to slower production of copper and copper alloy semi-fabricated products, meaning that less new scrap is produced. Falling metal prices also mean that less old scrap is collected, because margins fall.
"Tightness in scrap has meant that around 150,000 tons of copper cathode has had to be used by (Chinese) mills in place of scrap," independent consultant Simon Hunt said. Copper cathode is metal that has been electro-refined.
To be sure, it isn't out of the question that China is willing to finance the import and the holding of stocks at home.
The country's insatiable appetite for commodities - particularly copper, used in construction and housing - played a huge part in the commodities bull run of recent years.
Although China's growth story have been sidelined by the economic downturn, it hasn't vanished. And China has been the only real metals buyer of any significance since the start of the year.
But while the government does have purchasing intentions, analysts say the direct goal of its various methods of doing this isn't diversification away from the dollar, but to shore up local producers and replenish stockpiles.
With copper prices at almost half their July value, when the market peaked at $8,940/ton, it's an ideal time to be buying the metal.
Analysts and traders estimate China's Strategic Reserve Bureau has contracted to buy between 250,000 tons and 350,000 tons of copper for stockpiling so far this year, although purchases are spread throughout 2009.
The state is also supporting domestic smelters struggling under the weight of collapsed prices by buying metal of all kinds directly from them.
Most recently, Hunan Nonferrous Metals Corp. (2626.HK), the parent of China's largest zinc producer Zhuzhou Smelter Group Co. (600961.SH), said it will spend CNY1.2 billion ($175.4 million) to stockpile five industrial metals - lead, zinc, tungsten, indium and antimony - from its subsidiary smelters.
Similarly, a number of provinces, including Shaanxi, Guangxi and Yunnan, are paying for metals producers to warehouse their output.
Private investors in China have meanwhile returned to the metals markets, taking advantage of the relatively low prices. This is especially the case for nickel, brokers said.
"Like copper, China's nickel imports jumped to a record high last month; also like copper, that surge is a misleading indicator of a market where end-user demand appears as anemic as it was late last year," said Alex Heath, head of base metals at RBC Capital Markets.
"Unlike copper, however, it is private investors - not the government's strategic reserve agency - who are stockpiling the stuff, anticipating that beaten-down prices will soon follow other base metals higher as Chinese mills make more stainless steel," he added.
A similar buying strategy is starting to emerge for zinc and lead, traders say.
At the same time, the copper fabricating industry in China is replenishing inventories after winding down stocks. Analysts estimate this buying accounts for around 150,000 tons to 250,000 tons.
But if copper is anything to go by, midyear - if not sooner - should provide a more balanced picture in China.
"China probably was short of around 150,000 tons of (copper) scrap in the first quarter, but with these imports arriving together with the rising copper prices, more domestically produced scrap should be forthcoming," said Hunt.
This could have a detrimental impact on copper prices, which have been rising as sentiment over the outlook for the global economy grows more optimistic.
The rise in LME copper prices so far this year is widely believed to be unsustainable, given a lack of real underlying demand and the likelihood that producers will start to crank up supplies.
"Led by the steep price appreciation of more than 50% since the beginning of this year, copper producers are more likely to increase supply, largely to compensate for lower revenues due to the prior decline in copper prices," said Eugen Weinberg of Commerzbank.
"We see a risk of copper prices coming under pressure again, once China's reserve purchases abate and underlying demand fails to pick up," he said.
-By Andrea Hotter, Dow Jones Newswires; +44 (0)20 7842 9413; andrea.hotter@dowjones.com |
