Image via Wikipedia
In January, China imported 413,964 tons of copper, up 13.6% from the same month in 2011. The increase is even more impressive when you correct for the Lunar New Year. Due to the holiday, there were four fewer working days in China last month as compared to January 2011. Copper imports, in any event, exceeded consensus estimates.
December was also good for copper bulls. That month, China imported a record high 508,942 tons, an astounding 47.7% increase from the previous year.
China is hoarding copper. The country in Q4 added about 300,000 tons to its already impressive stockpile.
China’s purchases are far in excess of anticipated need. Estimates for growth in refined copper consumption this year are generally in the 6.0-6.6% range, well below 2011’s 8.5% increase and the 11.5% jump in 2010.
And these estimates for 2012 could end up on the high side. Construction in China faces troubling prospects this year as prices across the country moderate, decline, or plunge, depending on the specific sector. And appliances manufacturers, the second-largest users of the metal in China, face a tough year as Beijing ended its two-year-old appliance-purchase subsidy on December 31. These factors, plus a slowing economy, have led researcher Shen Xiaoqiang to predict that the percentage growth in copper demand in China will fall by half this year to the weakest level since 2006.
So why are Chinese enterprises buying copper like there’s no tomorrow? Some maintain Beijing sees shortages of the metal while others think the Chinese are just trying to take advantage of recent price declines. Then there are those who believe that central bank officials are tired of holding U.S. government paper and would like to get their hands on hard assets.
Yet there is another reason, this one buried in the January trade numbers released Friday by the General Administration of Customs. Year-on-year, China’s exports were down 0.5%. The month-on-month figure was even worse. It was off 14.2%. Despite the decline, the trade surplus came in at $27.3 billion, up from $16.5 billion in December and $6.5 billion from a year earlier.
Beijing racked up the outsized surplus because imports plummeted in January. They were off 15.3% year-to-year and 22.4% month-to-month. The size of these declines especially surprised China watchers.
The official Xinhua News Agency said trade “slumped” in January. Obviously, the early Lunar New Year had some adverse effect on the numbers, and analysts are continuing to argue over the primary cause, but it is indisputable that the big trade surplus comes at the wrong moment for Xi Jinping. China’s vice president, expected to be named the country’s supreme leader this fall, will visit Washington, D.C. on Tuesday. The Obama administration, not surprisingly, is expected to put trade issues at the top of the list of matters to raise with Mr. Xi.
Those discussions would be more troublesome for Xi if it were not for China’s large copper purchases, because then its trade surplus would have been even more off-the-charts. And so it’s no surprise that, at the moment, Chinese enterprises are on buying sprees for other commodities, especially crude oil.
So what does Beijing’s politically motivated copper purchases mean for future demand? On the one hand, they suggest that Chinese enterprises will continue buying the metal to dress up trade numbers in succeeding months. At some point, however, Beijing will put an end to the years of stockpiling. My guess is that will happen in the middle of this year, perhaps early fall.
Why? First, by then the slowdown in the economy will become evident, and stockpiling will no longer be able to mask the fact that imports, a proxy for domestic consumption and growth, are tumbling. Second, Chinese enterprises will run out of money to buy unneeded metal. Soon, China, which accounts for about 40% of global demand for copper, will not be able to support world prices by adding to its hoard.
“Underestimating China is the last thing any copper market participant should ever do,” writes the Wall Street Journal’s Andrea Hotter. That was certainly true in October when she wrote this, but now, with a troubling falloff in growth at home and severe problems in China’s largest export markets, it looks like the real risks, come summer, will be on the long side of the copper market.
Follow me on Twitter @GordonGChang
