[HONG KONG] China may be about to shock the global copper market by unleashing some of its stockpiles of the metal, which are near record highs, onto the global market.
Four traders of copper, including two from state-owned Chinese smelters, said they expect China to raise its copper exports - which are usually tiny - in the next few months. China's refined copper exports averaged less than 10,000 tonnes a month in the first two months of 2016, and around 17,000 a month in 2015.
If higher exports materialise, they will be a major jolt to producers and investors in the metal across the world - in particular because it would come during what is traditionally the strongest period of demand for copper from China, the world's largest consumer of the metal.
It will also be a further sign that the Chinese economy is still struggling against headwinds. Some sectors that buy copper - such as construction and manufacturing - have been hit especially hard in the past couple of years.
Traders and analysts in China say slowing building construction and electronics manufacturing has stifled demand for refined copper from the nation's massive smelting sector at a time when the country is already swimming in the metal.
China's copper consumption has been a crucial measure of the country's economic growth as the metal forms the essential network of its infrastructure, carrying water, conducting electricity and comprising the circuits in its machines. "The situation for copper smelters in China is probably the worst it has been in 20 years. But they won't admit it. It wouldn't surprise me in the least (if they start exporting),"said a source at an Asian copper producer, who declined to be named because he is not authorised to speak to the media.
Increasing Chinese exports would mark an abrupt turnaround in global copper trade flows as China's refined copper imports hit a record in 2015.
Any exports could deliver a major psychological blow to market sentiment that has been buoyed lately by a more than 10 per cent rally in prices since mid-January.
The outbound flow of metal would also question the wisdom of the world's top mining companies to dial up copper production on the assumption of strong long-term demand out of China.
In the past 20 years, copper producers around the world have opened new mines and increased production from existing ones because they knew that China would swallow just about any of the metal they could produce.
This was particularly the case during the massive commercial and residential development boom from 2005-2015 as the Chinese government pushed more people to move from rural areas into the cities. China now has 16 cities with more than 5 million people.
But the faltering Chinese economy has changed all that. Many buildings, particularly in secondary cities remain empty, meaning demand for new housing projects has plummeted.
COPPER DEMAND WEAKER THAN BEFORE
The slumping consumption comes as the surging imports of 2015 and earlier this year have left China's copper stockpiles bulging and even the usual seasonal uptick in copper demand in the second quarter is not likely to help the country's smelters.
"We still will see a seasonal demand rise this year, but it is likely to be weaker than previous years," said one of the traders at a state-owned smelter, who declined to be identified because he was not authorised to speak to the media.
China may hold more than 1 million tonnes of refined copper stocks currently, including bonded stocks, exchange stocks and metal held by traders and smelters, according to estimates from He Xiaohui, an analyst at state-backed research firm Antaike.
That amounts to 11 per cent of China's 9.15 million tonnes of refined copper consumption in 2015.
More than 480,000 tonnes of copper are probably stored in bonded warehouses in Shanghai, areas where metal is stored without being subject to customs duties, according to three traders.
Inventories monitored by the Shanghai Futures Exchange (ShFE) CU-STX-SGH hit a record 394,777 tonnes on March 18 though they have since dropped to 368,725 tonnes as of last Friday.
China's smelters may also take advantage of tax rules that would reduce their exposure to import and export levies.
At least eight large Chinese smelters are allowed to export refined copper cathode under a tolling scheme. Under the plan, they can import raw material copper concentrate without paying a 17 per cent value-added tax as long as they export the refined metal, at the same time avoiding a 10 per cent export tax.
"The trend we've seen in other markets - where raw material imports have been growing strongly to feed excess capacity in other markets and subsequently export it offshore - suggests it's a strategy that could be replicated in copper," said Daniel Hynes, senior commodity strategist at Australia and New Zealand Banking Group.