Commodity Blog

Even as the Chinese government moves quickly to help struggling domestic metals producers by stockpiling their products and reducing export taxes, industry participants are concerned those very actions could prolong the slump in the sector.
Such actions are already distorting trade flows by masking the real supply-demand situation in the country, they said.
Government stockpiling and tax and tariff changes to support base metals prices may depress international prices in the longer term if it delays capacity closures necessary to restore supply and demand balance, Barclays Capital said in a note Tuesday.
That warning comes close on the heels of similar views expressed by Australia’s Macquarie Bank which said China’s State Reserve Bureau may buy up to 1 million metric tons of aluminum to support the market.
“Our concerns about this are twofold — first, it will delay production-cut decisions in China and second, the SRB has no need to hold a stockpile of aluminum in the long term and (therefore) is likely to offload this material when the market starts to recover, potentially delaying any recovery in prices,” Macquarie said in a note Monday.
Some producers may already be rethinking production cuts as the government is expected to announce a slew of export incentives in a widely talked about industry restructuring and rehabilitation plan.
China will likely raise the export tariff rebates — effectively lowering export taxes — on metals products, China Business News reported Tuesday, citing a draft stimulus plan for the metals industry.
To increase exports of value-added products, the government plans to raise export rebate on products such as refined copper tubes, refined copper plates, aluminum foil and aluminum plates to 13% from 5% now, said the report.
The government also plans to introduce an export tax rebate of 5% on aluminum alloy where none existed before, the report said.
The plan has yet to receive final approval from the State Council, China’s cabinet, a senior official at the China Nonferrous Metals Industry Association said Monday.
But it could happen soon and details of the plan may be officially announced this week, said Yang Changhua, an analyst with state-owned Antaike metals consultancy.
Imports Rising Despite Poor Domestic Demand
Government action to support the market is already seeing some unintended results.
The relatively robust performance of most base metals imports in January, based on data released by China’s customs department Monday, belies slowing domestic demand, Barclays pointed out.
Chinese primary aluminum imports, for example, rose 19% on year in January to an almost two-year high, mostly because aluminum futures on the Shanghai Futures Exchange command a premium of $500 a metric ton to London Metal Exchange prices.
“This has attracted growing volumes of imported metal, leading to calls for an import tax,” Barcap said. “The Chinese aluminum market is vastly oversupplied.”
SHFE prices should be at a discount to LME, but the State Reserve Bureau’s stockpiling decision “is creating the price distortion,” the report said.
“This is bad news for the aluminum market, as higher prices are creating a (disconnect) between supply and demand by delaying production cuts and encouraging some production to be restarted at a time when demand is falling and the surplus is growing rapidly,” it said.
Following meetings with 11 Chinese aluminum smelters in Beijing last week, SRB is likely to buy another 290,000 tons of aluminum in March, the same amount it bought in January, to help the local industry through the downturn, Macquarie said.
May Lead To Higher Import Taxes On Some Metals
Macquarie expects more state buying in the months ahead with a total planned purchase of as much as 1 million tons, prompting even more imports and the need for higher import taxes at some stage.
Last week, the China Non-ferrous Metals Association said the government had no plans to reinstate aluminum import tariffs, but “at some point, authorities may have to impose import duties to prevent net imports of the metal,” Macquarie said.
“Although Chinese officials have denied speculation about a potential rise in the aluminum import duty, we believe this view can be rapidly adjusted if aluminum imports jump in the coming months, as is starting to appear likely,” the Australian bank said.
The same could be true for other base metals as well.
Lead imports in January were up 13% on year as stronger demand supported domestic prices, with lead currently trading at a premium of around $430/ton to LME.
“We are hearing that Chinese physical demand has started to soften and with the seasonally slower second quarter just around the corner, we expect a decline in imports over the coming months,” Barcap said. Lead concentrate imports have already fallen 7% on year, reflecting slower demand from smelters.
Zinc imports rose to four times the level seen in January 2008, reflecting ongoing arbitrage play, while a fall in zinc concentrate imports by 15% on year reflected weaker smelter demand and production cuts, said Barcap.