Commodities

COLUMN-Learning to live with (talk of) Chinese state metal sales: Andy Home

Credit: REUTERS/KHAM

China's plan to start releasing strategic stocks of metals is testament to the scale of the turnaround in industrial metal markets over the last twelve months.

By Andy Home

LONDON, June 16 (Reuters) - China's plan to start releasing strategic stocks of metals is testament to the scale of the turnaround in industrial metal markets over the last twelve months.

This time last year China's state stockpile managers were under pressure to buy up metal from local producers reeling from the impact of coronavirus. Prices had just slumped to multi-year lows as the world's largest user went into lockdown.

Fast forward a year and the same stockpile managers are now being instructed to sell metal as Chinese policy-makers try and dampen the effects of the remarkable price rally that has since unfolded. Copper, for example, has rocketed from a COVID-19 low of $4,371.00 per tonne in March 2020 to an all-time nominal high of $10,747.50.

The last time China sold its metal reserves was in 2010 when markets were also rebounding from a global crisis.

However, those one-off tenders are not going to be the template used this time around, particularly when it comes to the state's huge copper reserves.

The copper market is going to have to live with the threat of Chinese state sales for the foreseeable future.

PUBLIC TENDERS

What was then China's State Reserves Bureau (SRB) sold 213,700 tonnes of aluminium, 50,000 tonnes of zinc and 34,500 tonnes of lead in November 2010.

The lead was an opportunistic sale of old material accumulated between 1970 and 2000 and uptake was unenthusiastic, amounting to just 16,535 tonnes.

The aluminium and zinc sales were partial unwinds of purchases made during the depths of the financial crisis in 2008 and 2009.

When the going gets tough for Chinese metals producers, the state steps in and hoovers up excess. The SRB bought more aluminium in 2012 and 2013 when local prices were trending steadily lower as the post-crisis bounce faded, but conspicuously declined calls to do so during the price troughs of 2016 and 2020.

The SRB's cumulative activity over the 2008-2013 period resulted in the net purchase of 775,000 tonnes of aluminium.

It's no coincidence that analysts' estimates of China's state aluminium reserves range around this number since the SRB tenders were publicly disclosed at the time and everyone can do the maths.

What we don't know is how much legacy stocks were held, although one report in 2010 suggested 100,000-200,000 tonnes, which would tally with estimates that up to 800,000-900,000 tonnes could be released this time around.

But at least we have some idea of what's in the state coffers because the SRB wanted its activity, particularly the purchases, to send a wider price message.

Moreover, aluminium isn't classified as a strategic metal in China, allowing the state more latitude for public disclosure.

CHANNELED SALES

Copper, however, is deemed a strategic metal. China has a lot of it - probably in excess of two million tonnes - but both activity and size of inventory are treated as state secrets.

There is no history of public tenders and state metal reserve officials haven't spoken publicly about their plans for many years.

There were reports in 2010 that the state was selling copper at the same time as the other metals via targeted deliveries to key users rather than public tenders, although there was also a theory the releases were just older inventory being rotated.

Certainly, such channeled sales seem to be the proposed strategy by what is today The National Food and Strategic Reserves Administration (NFSRA).

Chinese media reports suggest batch sales with a minimum take of 500 tonnes, which would seem to favour larger manufacturers deemed strategic to core end-use sectors such as China's power grid.

PRICING SIGNAL

It's quite possible we're in for a new phase of Chinese state transparency since the new proposed sales are also intended to have a wider market resonance.

Even talking up the prospect of sales helps dampen some of the speculative bull froth that has built up in China's domestic commodity markets.

State reserves are just one component of a multi-pronged attempt to cool commodity price inflation before it feeds through into a bigger economic headache. The proposed sales should be seen in the context of repeated government warnings about "speculation", "hoarding" and "price manipulation" as Beijing tries to slow a commodities bull wave created by its own pandemic stimulus.

Talking about sales, however, is a very different thing from actually selling.

Sales will depend on whether there is demand for state metal and while there is an argument that China's domestic market could do with an injection of aluminium, there is no sign of crisis in the copper sector.

PART OF THE NARRATIVE

China has imported huge amounts of refined copper since the start of last year - almost six million tonnes - with the state reserves manager ironically thought to have added to that tonnage.

The local market shows every sign of being glutted with Shanghai Metal Market's Yangshan premium SMM-CUYP-CN - a widely watched indicator of Chinese import demand - currently at a record low of $21 per tonne.

China's copper buyers may undoubtedly be struggling with price but are unlikely to be facing material shortages.

A stronger argument could be made for releasing aluminium. Although China is the world's largest producer, it has been running short of commodity-grade metal as evidenced by growing imports.

Strong demand has met constraints on domestic supply as smelters in Inner Mongolia face energy efficiency restrictions and those in Yunnan are impacted by drought in a hydro-powered province.

Interestingly, the 2010 aluminium sales also coincided with drought in Yunnan and restricted supply was explicitly cited as one reason for the release of state stocks.

The NFSRA's problem is that a lot more supply-side disruption is coming for the domestic aluminium market as the country's coal-dependent smelters try and keep pace with China's decarbonisation drive.

The need to use state inventory to smooth out that process will be around many years. Channeled sales may be a way of accepting the reality of limited firepower whilst maximising the price signal.

As for copper, if the supercycle bulls are right, both China and the rest of the world could be heading for severe shortages over a 10-year time-frame.

There's an even stronger argument for China to keep its copper powder dry for the future and it's noticeable that there is a good deal of scepticism around the market about how much copper is going to be released.

But the real significance of this announcement is that whatever the size of any immediate sales, talk of state sales is likely to become part and parcel of the copper and broader metals market narrative going forwards.

That's because Beijing wants it to be so.

China's strategic stocks activity in the aluminium markethttps://tmsnrt.rs/3vyUwz0

(Editing by Elaine Hardcastle)

((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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