China is now the second largest consumer of refined copper in the world. It accounts for about 12 percent of the global total, compared with just under 20 percent for the US, and its consumption has been growing at 15 percent a year. In 1998, copper demand in China for the first time surpassed that of Japan.
During 2000, imports of refined copper soared by 65 percent to 667,608 tonnes. The country's exports of copper also rose by 21 percent to 114,525 tonnes, which took net imports to 553,083 tonnes, representing year-on-year growth of 39 percent. In 1997 net imports were just 70,000 tonnes.
What are the reasons behind the boom in Chinese copper consumption and the surge in copper imports? A key factor has been the strong domestic economy, which has been one of the star performers of the global economy. Furthermore, the economy is still going through a metal-intensive period of growth.
Much of this growth has been prompted by a massive state investment campaign aimed at creating jobs, spurring consumer spending and staving off bankruptcies at state companies. As a result of the slowing global economy, export growth has slowed to 10-20 percent, compared with 20-30 percent in past years. The Chinese government hopes to counter this slowing trend by boosting domestic demand through infrastructure spending.
A key aim of the infrastructure programme is to connect the west and centre of China to the more prosperous east and open up new markets in the interior. Copper is used both in basic infrastructure projects, such as copper power cables, and in electronic consumer goods such as mobile telephones, personal computers and Internet use. Much of the future growth in copper consumption will come from the deepening consumer base as the interior is developed.
The main problem in China is not one of weak demand but rather excess inventory and the fact that domestic production continues to rise sharply. For example, the production of copper semis in China rose by nearly 22 percent year-on-year in the first quarter of 2001. In addition, industrial activity in key copper-consuming sectors was also strong – motor vehicles up 21 percent, power generation equipment up 15 percent, AC electric motors up 24 percent, air-conditioners up 45 percent, refrigeration up seven percent, integrated circuits up 21 percent, and switch-boards up 90 percent.
Last year's surge in shipments to the Chinese market (both domestic and imports) was far in excess of what could have been realistically consumed, and a significant proportion went into inventory. At the end of April, inventories on the Shanghai Futures Exchange were 81,000 tonnes. In addition, anecdotal evidence suggests that in excess of 100,000 tonnes have been accumulated at ports on the eastern seaboard of China. Much of this material is held in bonded warehouses and was attributed to arbitrage purchases made in the first half of last year.
The widening differential between the Shanghai and London Metal Exchange markets creates a temporary arbitrage for Chinese buyers. This arbitrage is commonly expressed as a ratio and when it is above 10, importers tend to lock in the arbitrage and import metal from the West. The converse also applies – if the ratio is low enough, exporting metal to the West becomes attractive. Import trends are further complicated by traders importing copper in order to open letters of credit to obtain finance for speculating in the domestic stock market.
Lifting refining capacity
Chinese copper production in the first quarter of this year rose by almost 22 percent to 333,000 tonnes, including 50,000 tonnes of secondary production. Domestic producers in China are in the process of lifting refining capacity. The largest project is at Jiangxi Copper Co, where annual capacity is being raised to 350,000 tonnes from the current 200,000 tonnes. Tongling Non-ferrous Metal Co hopes to raise capacity by 80,000 tonnes-a-year. Other companies planning to boost capacity include Yunnan Copper, Daye Non-ferrous Metals and Jinchuan.
The expansions planned, or under consideration, will largely keep pace with domestic Jemand growth, rather than fundamentally altering China's propensity to import. Even with these planned capacity increases, Domestic production will still fall short of the 1.6m-1.7m tonnes consumed annually.
Trade data for the first quarter of this year tends to support the view that the Chinese market is oversupplied. China imported 131,000 tonnes of refined copper in the first quarter this year, a rise of 9.7 percent year-on-year, with 65,000 tonnes of this coming in March. Net imports totalled 116,000 tonnes. Import growth is thus likely to remain slower this year, as a result of high inventories and sharply rising domestic production.
In addition to imports of refined metal, China imports substantial quantities of cop-per raw materials in the form of scrap and concentrates. Reflecting the increase in smelting capacity in recent years, annual imports of scrap and concentrates exceed 4m tonnes in gross weight. Domestic mining production is struggling to keep pace with the expansion of smelting capacity and, with annual mine output of about 570,000 tonnes a year, is less than half annual smelter output.
In the first quarter of this year, imports of concentrates rose 14 percent to 446,981 tonnes (gross weight), scrap rose 17 percent to 693,000 tonnes (gross weight) and mining production rose 9.8 percent to 138,748 tonnes (metal content). The widening gap between mine and smelting capacity is likely to push imports of copper concentrates to more than 2m tonnes in 2001 from 1.81m tonnes last year. Late last year, the government approved annual import quotas for 800,000 tonnes of tax-free copper concentrates for the next three years to ease the bur-den on producers. The imports will be free of 17 percent VAT, which will be rebated, although it would be charged again on sales of refined copper.
Buying mines overseas
China is relatively poorly endowed with cop-per resources and ore grades of existing mines are lower than those in the West. This has spurred interest in acquiring mines over-seas. In July 2000, state-owned firms reopened the Chambeshi mine in Zambia. The mine's rehabilitation is costing US$150m, with full output of 45,000 tonnes a year to be reached in three years.
More recently, the Metallurgical Construction Corp of China has signed a 10-year lease for the Saindak copper-gold project in Pakistan. MCC is to pay the government of Pakistan US$500.000 a month rent for the project, in addition to 50 percent of the operation's total output. The project is capable of producing 15,810 tonnes a year of blister copper over a period of 20 years. The project has been closed since 1995 due to a shortage of working capital.
Evidence suggests that Chinese copper consumption is set to remain robust, driven by domestic demand for electronic consumer goods, rising self sufficiency in terms of semi-fabricated copper products and the relocation of foreign manufacturers to China. Growth should be similar to that of industrial production, at around 9-10 percent a year. The government intends to issue US$18bn in bonds this year and next to pay for infra-structure projects. This will be in addition to loans from banks. For example, the China Construction Bank plans to invest US$17bn in infrastructure projects this year, which represents about 75 percent of all corporate loans released by the bank.
This article was written by Robin Barr, a base metals researcher at Standard Bank, and first appeared in The Ringsider, published by the London Metal Exchange.