China's copper imports surge lacks an obvious driver

Trucks ferry excavated copper ore from the pit at the Bisha Mining Share Company in Eritrea. Chinese imports of copper have surged. Thomas Mukoya/Reuters

One of the standout features of China's commodity imports this year has been the surge in copper, which has taken place without a seemingly strong market narrative as justification.

Imports of unwrought copper climbed to 475,000 tonnes in May, according to customs data released on June 8, up 22 per cent from the same month last year and the highest in 17 months.

Imports for the first five months reached 2.15 million tonnes, up 16.7 per cent on the same period in 2017.

It's not just unwrought copper shipments that are booming, with imports of ores and concentrates up 14 per cent in the January-May period to 7.8 million tonnes, the most for the first five months of a year since at least 2000.

When searching for reasons the obvious anchor is Beijing's decision to ban the import of certain types of copper scrap, announced in April and scheduled to be implemented from the start of next year.

However, it appears that the authorities are already limiting the importation of what is termed Category 7 copper scrap, which includes coiled copper cable and waste motors.

The volume of Category 7 copper scrap imports approved in the first 11 batches in 2018 has dropped 84 per cent from the same period last year, consultants Wood Mackenzie said in a research note distributed last month.

About 300,000 tonnes of contained copper is likely to be lost because of the lower scrap imports this year, Wood Mackenzie said.

However, increased supplies of domestic scrap will offset some 200,000 tonnes of this, leaving only a shortfall of about 100,000 tonnes, the consultancy said.

While not an insignificant number, it's worth noting that imports of unwrought copper are already 310,000 tonnes higher in the first five months of 2018, compared to the same period in 2017.

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While unwrought copper is a broad import category and some of the products within this won't be fully refined, it's still the case that China has already brought in more than enough extra copper in the first five months of the year to make up for the total expected loss for the year from lower scrap imports.

Another reason that copper imports may have surged in May is that the arbitrage between London and Shanghai futures was likely open, allowing traders to profit by shifting copper to China.

At the start of May, benchmark LME copper was at $6,745 a tonne, while Shanghai copper was at $8,128.

Even when the value-added tax and other customs charges are applied to imports, buying copper in London and selling in Shanghai would likely have been profitable in recent weeks, and indeed for much of 2018 so far.

However, a recent jump in the LME price has seen copper go from $6,840 a tonne on May 30 to as high as $7,332 on June 7, before it eased to close at $7,255 on Monday.

While Shanghai copper has also rallied, it hasn't quite matched the gains of the LME contract, meaning it is currently more difficult to make a profit trading the arbitrage.

Another reason for strength in China's copper imports is actual consumption is robust, with manufacturing and construction posting gains so far this year.

More copper is also being used in vehicle manufacturing as China increases the share of copper-intensive electric vehicles.

The combination of lower scrap imports, an open arbitrage window with London and relatively strong economic growth certainly provide sufficient reasons for copper imports to have gained as strongly as they have.

However, whether this continues is far from certain, with some question marks emerging over the likely future strength of construction in China, the threat of trade war over manufacturing exports and the adjustment of the market to the restrictions on scrap imports.

Reuters