London, 26 June 2011: Reuters

China's full trade report for May sprung few surprises in terms of headline imports of base metals. As flagged by the preliminary snapshot released earlier this month net imports of refined copper were weak at 129,000 tonnes, albeit slightly higher than those in April thanks to a drop-off in exports to 20,000 tonnes from 44,500 tonnes.

Net imports of primary aluminium shrank to 3,300 tonnes, the lowest monthly figure so far this year, while exports of product accelerated to a new all-time high of 340,000 tonnes.

The latter is thought to reflect exporters rushing to beat an expected tightening of the tax rebates on several product categories. Net imports of both tin and nickel at 800 tonnes and 13,600 tonnes respectively marked a continuation of recent trends.

Net trade in lead remains broadly flat, while China continues to import zinc it doesn't need in what appears largely a function of "financial" arbitrage. More interesting this time around were some of the raw materials numbers.

NICKEL ORE SURGE

China's imports of nickel ore and concentrates surged to an all-time high of 4.19 million tonnes, far eclipsing the previous high of 2.85 million tonnes in September 2009. Booming imports, in excess of two million tonnes, from both Indonesia and the Philippines were the driver.

Ore imports from these two countries feed nickel pig iron (NPI) producers and as such are a widely-used proxy for what is happening in the NPI sector, which doesn't make it onto the official count of Chinese nickel production.

It's an imperfect proxy. For example, it is quite possible that May's super-high figure reflects stock building rather than actual NPI production. Yet the broader trend is one of steadily rising ore imports. They jumped by 52 percent last year and are already up by another 62 percent this year.

That would seem to back up anecdotal evidence that NPI production is on a surge in China, reflecting a new generation of operators that are increasingly integrated with stainless steel mills.

The effect is to mute import demand for other types of nickel, most notably ferronickel, imports of which dropped 15 percent in the first five months of this year. Net imports of refined nickel have remained relatively steady so far this year, although it's worth considering what they might have been were it not for an increasing reliance on NPI by China's stainless sector.

The more interesting question is what happens next.

How will the combination of lower nickel prices and a summer power crunch affect Chinese NPI production rates? There is a mix of views in the analyst community as where NPI sits on the nickel cost curve. It's relatively high but exactly how high is difficult to say because the sector encompasses a wide spectrum of operators using different types of technology.

Barclays Capital, for example, suggests that "marginal NPI producers are now loss-making" but be warned that the Chinese NPI sector has up to now proved far more resilient than Western observers had anticipated.

The next few months' data will be worth tracking closely. The strength of Chinese NPI production is the key "missing link" in terms of assessing global market balance this year.

ALUMINA SLUMP

China's imports of alumina, by contrast, slumped to a multi-year low of 113,500 tonnes in May. It wasn't a rogue figure. Imports fell by 16 percent last year and have fallen harder still this year. The cumulative Jan-May total of 945,000 tonnes marked a 57-percent year-on-year drop.

Remember that Chinese aluminium smelters have been churning out record amounts of the light metal this year so the slump in alumina imports is not for want of demand. Rather, China's own alumina production has been rocketing in recent months. It surpassed the 3-million tonne level for the first time ever in May and cumulative output this year has increased by 16 percent.

Indeed, based on figures from the National Bureau of Statistics and using a 2:1 ratio for the amount of alumina needed to make one tonne of aluminium, China has been generating a surplus of the raw material for the first time ever this year.

Not that it is self-sufficient in the bauxite needed to make the alumina. Imports hit a new high of 4.5 million tonnes in May and cumulative flows jumped by 56 percent in the first five months of 2011.

MIXED SIGNALS IN COPPER

China's imports of copper raw materials have been less clear cut so far this year. Imports of scrap were up by 6 percent year-on-year in the first five months. They have been running at a very steady monthly rate of close to 400,000 tonnes for some time now.

The figure is low by historical standards. For example average monthly imports of scrap were 465,000 tonnes in both 2007 and 2008.

However, it's worth stressing that these figures from China's customs department are bulk weight and that there is good circumstantial evidence that the copper content of what China imports is steadily increasing.

Specifically, the price of imports relative to the prevailing LME price, a way of estimating how much copper is in the scrap, has been trending sharply higher in the last couple of years.

From under 20 percent prior to 2008, the ratio increased to 30 percent in 2009 and to 38 percent in 2010, according to figures from the International Copper Study Group. There's no strong reason to suggest the trend hasn't continued into 2011.

So, while scrap imports in outright tonnage terms look on the low side, more actual recoverable metal is entering the country.

That is quite possibly one factor in China's ability to destock refined metal longer than most observers had anticipated. Scrap has a double-impact on China's internal copper balance. Via direct-use melt it can act as a substitute for copper cathode at the first-stage consumption level.

And via secondary production it can help reduce dependence on imported concentrates.

The latter have trended sharply lower this year. Cumulative Jan-May imports of 2.35 million tonnes, bulk weight again, represented a 15 percent year-on-year decline.

China's refined copper production, by contrast rose by 14 percent over the same period, Domestic mine output rose by only 13 percent and was still a fraction of what the country's copper smelter sector needs in terms of raw materials.

Increased scrap availability, both in terms of domestic generation and imports, may well have filled part of the gap. But it's still hard to avoid the conclusion that smelters have been de-stocking concentrates, quite possibly with one eye on treatment and refining charges, which have stayed higher for longer than widely expected this year.

Mid-year terms appear to have been settled at $85 per tonne and 8.5 cents per pound, more than double the figure achieved in the mid-2010 negotiations.

Ends --

By Andy Home, Reuters market analyst – for Commodities Now.

The views expressed here are his own.