(MENAFN- Gulf Times) China will be the key determinant of industrial metal prices this year.
Nothing new there then. The country has played the starring role in the sector for many years, thanks to its stellar contribution to global demand growth for everything from aluminium to zinc.
What has changed over the last couple of years, though, is the country's own surging output of refined metals following years of production capacity growth.
In the aluminium market, for instance, what China imports from the rest of the world is far less significant for prices than what it exports.
In the case of metals such as nickel and tin, the question is whether China can sustain its own production in the face of raw material constraints. The current betting in both is that it won't with bullish price implications.
Copper is arguably the last of the base metals in which China is still an unequivocal importer. As such, its trade figures might still be viewed as a gauge of the country's manufacturing health, but even then only through a highly distorted lens.
But copper now occupies only one end of a shifting spectrum of shifting price signals when it comes to China's metallic trade. So what are the key themes to watch out for this year?
Chinese exports of several base metals boomed over the second half of last year due to the Qingdao port scandal, which revolved around the multiple pledging of metal as collateral in the country's shadow banking sector.
The net effect was a flight of collateralised metal from Chinese bonded warehouses to safer-haven storage in the London Metal Exchange warehouse system.
This forced destocking showed signs of losing momentum as 2014 grew to a close and exports of metals such as zinc and nickel should fade as this year progresses.
Exports of aluminium semi-manufactured products, by contrast, are structural in nature, a reflection of the country's aggressive build-out of its own smelting capacity. Chinese demand for aluminium continues to grow faster than just about anywhere else. The problem is that its own production has been growing faster still with a conspicuous lack of supply discipline in the face of price weakness.
Exports of products, some of which push the boundaries of what might be classified as a product rather than minimally transformed metal, are a safety valve for Chinese surplus but a red flag for the market outside of China.
The export flow of products accelerated by almost 20% to 3.67mn tonnes
last year, culminating in a record high of 492,000 tonnes in December itself.
That may have been an outlier month, reflecting concern, so far unfounded, that Beijing was poised to adjust the favourable tariff rules on exporting product rather than primary metal.
Exports dropped back to 379,000 tonnes in January and a similar amount in February, judging by the preliminary figures out on Monday morning.
But these are still very high levels by any historical measure and the trend is still firmly upwards.
Moreover, what's happening with products dwarfs China's trade in primary aluminium. The country imported a marginal net 4,600 tonnes in January.
Chinese product exports are swamping the Asian market and have been one factor in the softening of the local physical premium market.
If the current trend continues, it bodes ill for both premiums and outright prices as Chinese material fills the deficit elsewhere created by producer cutbacks.
Chinese exports also hold the key to the lead market. The country turned net exporter of refined lead at the end of 2012 and it has remained net exporter ever since.
The volumes aren't huge, just 34,650 on a net basis last year, but China's apparent self-sufficiency has undermined the lead market's previous bull narrative and goes a long way to explaining why it has fallen so out of favour with the investment community.
In the nickel market, it is the sustainability of China's nickel pig iron (NPI) production that will determine whether the anticipated bull script unfolds.
One year on from the cessation of nickel ore exports from Indonesia, the single most important raw material input for NPI producers, the market is looking for signs of NPI supply stress.
China's imports of Indonesian ore have dwindled to nothing in recent months, leaving the Philippines as the only alternative supplier.
Both production and exports of nickel ore from the Philippines tend to be disrupted by the annual wet season over the year-end. And that pattern is clearly evident this year with imports slumping from over 5mn tonnes in June and July 2014 to just 1.1mn tonnes in January.
The implication is a further drawdown in already diminishing Chinese stocks of ore and putting more pressure on NPI producers to shutter.
Nickel bulls argue that as China's NPI sector retreats, so the country's import appetite for refined nickel will rise, providing much needed relief for an over-supplied Western market.
Refined imports collapsed last year to the point that China was a net exporter of refined nickel for the first time in many, many years.
The export flow was all about Qingdao and a reflection of just how much nickel had been sucked into China's collateral financing trade.
China reverted to net importer of refined metal in January, suggesting the Qingdao effect is fading.
To what extent refined nickel imports revert to historic norms will depend on the scale and speed of NPI closures in China and that, in turn, will depend on the extent to which material from the Philippines fills the gap left by Indonesia's ban on exports of unprocessed minerals.
The flow-through to refined metal trade, however, may be mitigated by imports of ferronickel, a cheaper form of the metal and one ideally suited to stainless steel producers.
Ferronickel net imports grew by 40% to 270,000 tonnes last year and January's net figure of 52,500 tonnes was an all-time high.
Worth watching in particular will be imports from Myanmar, a relatively new name on the list of Chinese suppliers. China imported 59,000 tonnes of ferronickel from the country last year, equivalent to 21% of the total.
And imports from Myanmar will also be closely tracked by the tin market.
The country has emerged as a major supplier of tin ore for China's tin smelting sector, helping it boost production even while domestic raw materials supply struggles to keep pace.
The market implications are two-fold. Firstly, China's official imports of refined tin have steadily decreased, falling to just 8,700 tonnes in 2014 from 14,300 tonnes in 2012 and 31,300 tonnes in 2011.
Secondly, and more significantly, Chinese exports have risen, albeit mostly in a form of the metal that doesn't show up on official trade figures.
Such unofficial seepage has been estimated by industry group ITRI as at least 6,000 tonnes last year. Look no further as to why the tin price has underperformed despite an apparent market deficit.
Whether these trends extend into 2015 will in large part be determined by whether the flow of ore from Myanmar continues at last year's pace.
At least China remains a consistent net importer of refined copper, indeed of copper in just about every form.
Import flows are still viewed as a proxy for manufacturing activity in China, albeit an extremely problematic one given the signalling complexity of stock cycles, both commercial and state, buyer behaviour and demand for the metal as collateral.
Imports of refined metal totalled 300,000 tonnes in January, a five-month low and they look to have slowed further in February, judging by a particularly low preliminary estimate.
A post-Qingdao clampdown on collateral financing and a ratio shift by buyers from annual to spot contracts this year are the most likely culprits.
But somewhere in the mix may also be a step-change in China's copper trade profile away from refined metal towards raw materials.
Scrap imports slid and concentrate imports boomed last year. The former trend is bullish for prices, since it translates into greater demand for primary refined metal. The latter is bearish since it implies higher domestic production to feed that demand.
China's impact on the copper market this year will be a function of all three trade segments, refined, scrap and concentrates. Equally complex will be the country's interaction with the global zinc market.
Refined zinc imports were another casualty of the Qingdao scandal. Indeed such was the outbound surge in previously collateralised metal that China turned net exporter in the fourth quarter of last year. It flipped back to net importer in January, albeit to the tune of just 7,500 tonnes, a highly modest outturn by historical standards.
The story in zinc, however, is all about a looming raw materials crunch as some of the world's largest mines reach the end of their lives.
The question is whether China will itself succumb to this crunch or mitigate it through lifting its own production. The interplay of the country's refined zinc and zinc concentrates import trends will bear close watching for clues. With the former falling 78% and the latter rising by 29% in January, however, any answer right now looks highly elusive.
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