LONDON - It was another record-breaking year for China’s imports of all things copper.

This morning’s preliminary trade report showed the Dragon’s appetite was undiminished in December. Imports of refined copper, copper alloy, anode copper and copper products came in at 344,558 tonnes, boosting the full-year total to 4.29 million tonnes, very marginally exceeding the 2009 all-time record.

It’s worth remembering that the previous year’s total represented a step-change in Chinese copper imports. They had totalled just 2.64 million tonnes in 2008.

There were some subtle changes in the mix of last year’s imports with those of refined copper likely to have dropped by around 6-7%, assuming that the December ratio breakdown was in keeping with previous months. The slack was taken up by higher imports of anode, which accounted for 9% of aggregate imports in the first 11 months of 2010, up from 5% over the course of 2009.

But that shouldn’t detract from the strength of China’s demand for imported refined metal, particularly given the fact that the arbitrage window for profitable imports was closed over much of the fourth quarter and completely in December itself.

The spot arbitrage has been a pretty poor indicator of the monthly flow of refined metal in recent months for two reasons.

Firstly, it became increasingly clear as the 2010 monthly figures rolled in that imports of metal under term contract, whereby buyers contract monthly tonnages directly with producers, have been higher than was expected at the start of the year. Indeed, the deferred arrival of such shipments may have been a specific factor in December.

Secondly, it has also become evident that some of China’s copper imports have entered bonded stocks limbo. Such metal has cleared customs and therefore counts as “imports” but has yet to be sold onto domestic buyers, at which stage the 17% VAT duty is payable.

This particularly happens during periods when the spot arbitrage is closed, as has been the case in recent weeks. The result is a build-up of “limbo” stocks, currently assessed at around 400,000 tonnes.

ANOTHER YEAR, ANOTHER RECORD?

What then to expect for this year? The overwhelming consensus is that we’re going to see another year of broken records when it comes to copper imports.

Indeed, the assumption is hard-wired into the current high copper price.

The fact that the Chinese spot market is decidedly lukewarm right now merely strengthens the bulls’ contention that China Copper Inc. will be forced to come back to the international market with renewed vigour once the current de-stocking phase ends. Think some time in the second quarter after the start of the Chinese New Year.

Certainly, there is no good reason to expect any significant falling-off in actual usage this year.

Beijing’s shift towards “normalizing” economic conditions, one eye firmly on bubbling inflationary pressures, may take some of the heat out of sectors such as residential construction. That, after all, is the intention.

So too will micro measures such as the end of subsidies on small cars, which is expected to temper China’s white-hot auto sector this year.

However, the base case scenario is for nothing more dramatic than a mild moderation of national economic growth. Moreover, core copper usage drivers such as investment in the power grid and the rural home appliances subsidy scheme will remain very much in place.

SUPPLY DYNAMICS

As such, it will be China’s internal supply dynamics that determine the level of import need over the coming period.

In this respect not everything may be quite as bullish as the bulls would have us believe.

Firstly, there is the not-so-little matter of all that metal in bonded warehouses, already “in” China but not yet released to domestic buyers. There are no hard figures for this “limbo stock” but if the 400,000-tonne guess-timate is near the mark, it would represent almost two months’ worth of imports and, incidentally, more metal than is currently stored in the entire LME global warehouse system.

Secondly, China’s own refined production is increasing all the time. National output of 4,374,000 tonnes in the first 11 months of 2010 was up by 12.6% on the year-earlier period, according to the National Bureau of Statistics.

The country’s appetite for raw materials to feed this growth rate was also undiminished last year. The concentrates imports figure is not included in the preliminary trade report but the strength of imports in the first 11 months of this year suggest last year’s record of 6.13 million tonnes will be exceeded.

Thirdly, there is the question of scrap, the least transparent part of the Chinese copper conundrum.

Scrap imports in December rose to a year’s high of 430,000 tonnes and at 4.36 million tonnes the cumulative 2010 total grew by 9 percent over 2009. However, scrap imports in that year collapsed, largely reflecting low scrap generation at a time of manufacturing recession in many other parts of the world.

At 363,000 tonnes last year the average monthly import figure was still some way off the pace of the 465,000-tonne monthly average in both 2007 and 2008.

However, these figures are deceptive. What China’s customs department reports is the bulk weight of scrap imports, not the copper content.

The purity of the scrap has been steadily rising. Speaking at a conference in November, Ma Xiaoxin, an official with China Minmetals, suggested that the average copper content of imports was 39% last year compared with 30% in 2009. On that basis scrap imports not only increased last year but may also have hit a new record high.

It may seem a marginal point but it is possible the market has significantly under-estimated the amount of copper entering the country in the form of scrap last year. That may mean it is also over-estimating the extent of any de-stocking of refined metal.

Moreover, December’s high imports, even if inflated by end-of-year pricing considerations, could be a taste of things to come. Not only will higher prices generate more scrap within China but, if previous periods of high copper prices are anything to go by, Chinese buyers may well prioritise scrap over refined copper imports on price grounds.

This is not an argument against China continuing to import large amounts of copper this year. It is merely to warn that the Dragon doesn’t need to rely on refined metal alone to fill its internal supply-demand gap.

© Thomson Reuters 2011