China’s Base Metals Imports Collapse: What Does It All Mean?

A drop in China’s refined base metals imports in the first half of this year seems to support falling Purchasing Managers Index (PMI) results, suggesting the slowdown in China’s economy is set to continue. In the words of Yasuo Yamamoto, a senior economist at Mizuho Research Institute in Tokyo, this is “….starting to become more dangerous,” a Reuters article reports.

“China’s economic growth rate will probably fall below 7 percent in the fourth quarter this year and may fall under 6 percent in some quarter next year,” Wang Jian, a senior researcher with the China Society of Macroeconomics, a research body affiliated with the National Development and Reform Commission (NDRC), is also quoted as saying.

Wednesday’s flash HSBC/Markit PMI showed output, employment and new orders all declining at a faster pace in July. The overall index of business conditions fell to 47.7 from June’s final reading of 48.2, a third straight month below the watershed 50, and the weakest level since August 2012, while the employment sub-index slid to 47.3 in July, the weakest since the depths of the global financial crisis in early 2009.

Meanwhile, Reuters’ Andy Home reports China’s net imports of refined copper slumped by 30% over the first half of this year, equivalent to 508,000 tons, or exactly twice the global copper market surplus for Jan-May this year. In other words, if China had bought as last year, there would be no surplus in the copper market.

Net imports of tin and aluminum also fell sharply by 44% and 81%, while imports of refined lead imploded by 88% to just 500 tons. So do we take from this that China is on track for a hard landing after all?

For us, the wonder is China’s rate of growth has slowed so gradually; with most of Europe contracting for the last two years and the rest of the world slowing so significantly, it is a wonder China has continued to grow as fast as it has. In spite of premier Li Keqiang’s assertion that the official growth target remained 7.5%, the reality is Chinese growth probably will slow further in H2 this year, and maybe even into next, but the sharp drop in refined metal imports are not a sign that raw material demand has collapsed.

As Reuters goes on to explain, the country had built up almost excessive stocks of some metals in 2012, for example 3.40 million tons of refined copper were imported in 2012, exceeding even the 3.19 million imported in 2009. This couldn’t and wasn’t all consumed by end users, and indeed part, probably some 600,000 tons, went into shadow stocks to be gradually drawn down by consumers as imports have waned this year.

Certainly, Beijing is starting to tackle (and is very worried by) widespread overcapacity in many traditional industries like aluminum, cement, steel and shipbuilding, so stimulus to the economy will not come in the form of indiscriminate bank lending for asset investment, as it has in the past. Consumer demand is also softer this year than last – witness the drop in Apple’s sales in China this last quarter, down 43% from the previous quarter and 14% from the same period last year.

Nevertheless, China’s economy is still growing, and is now so large that a 6% increase is equivalent in raw material demand to 12% ten years ago. The super-cycle may be over, but Chinese metals demand remains the most dynamic story in town.