(The opinions expressed here are those of the author, a
columnist for Reuters.)
* China's imports of aluminium: https://tmsnrt.rs/32HDYIA
* Shanghai London arbitrage window: https://tmsnrt.rs/2YXjLO8
By Andy Home
LONDON, Sept 2 (Reuters) - China imported more aluminium
than it exported in July.
This is a very rare phenomenon. China, after all, is the
world's largest producer of the light metal, accounting for 57%
of global output in the same month, according to the
International Aluminium Institute.
It is normally a huge exporter of semi-manufactured products
("semis") - around 5.2 million tonnes in both 2018 and 2019 -
with no need to call on extra supply from the international
The last time China turned net importer was in 2009.
Now, as then, the inversion in trade flows speaks to the
disconnect between a Chinese market that is in full recovery
mode and the rest of the world that is struggling to get back on
Most expect this import surge to be short-lived, as it was
in 2009, but the world has changed since then and it's possible
we're also seeing underlying structural shifts in the aluminium
China imported 123,000 tonnes of primary aluminium in June
and another 185,000 tonnes in July. The two-month count already
exceeds every yearly total since 2013 and most analysts think
there is more to come.
What's sucking this metal into China is an open arbitrage
window between elevated Shanghai Futures Exchange (ShFE) prices
and a lagging London Metal Exchange (LME).
The cash arbitrage between the two contracts
flexed out to a seven-year high above 2,000 yuan per tonne at
one stage in July.
Aluminium prices in both markets troughed in March but the
Shanghai market has led the recovery, consistently outperforming
the LME price.
To some extent this simply reflects China's resurgent
manufacturing sector, which is benefiting from a more
metals-heavy infrastructure boost than was widely expected.
It's why China's copper imports are also booming and why the
country's steel production is running so strongly right now.
In the case of aluminium, though, recovery exuberance has
been complemented by physical disruption in the country's
complex supply chains.
China's first-quarter lockdown seems to have opened up
supply gaps for specific products, particularly some forms of
primary metal. Local producers, meanwhile, seem to have
responded to the first-quarter price collapse by stopping sales
and accumulating stocks, helped by local governments' sudden
enthusiasm for building "strategic" reserves.
It's noticeable that the Shanghai contract remains fully
backwardated along the forward curve, the cash premium still
signalling availability issues.
However, the arbitrage window with London is now closing,
which should mean these primary metal imports abate after a
month or so of catch-up physical shipments.
The same, though, may not hold true of another sort of
aluminium that is being imported.
ALLOY FOR SCRAP
Imports of unwrought aluminium alloy have also surged over
the past few months. Indeed, the June-July tally of 302,000
tonnes is unprecedented, even during the financial crisis.
The gaping arbitrage window is also a prime driver of this
flood but the current deluge masks an underlying change of trade
China has historically exported more alloy than it has
imported. Alloy is a product generated from scrap metal and used
mainly for die-cast parts in vehicles, which means trade flows
have largely been shaped by Asian automotive companies'
off-shoring in China.
However, China turned a net importer of alloy in December
last year, well before COVID-19 and the London-Shanghai price
Net alloy imports so far this year are running at 524,000
tonnes. The last year China imported more alloy than it exported
was in 2005 and the net total was just 27,000 tonnes.
This suggests something more than simple arbitrage is at
It's noticeable that China's top alloy suppliers are
Malaysia, South Korea and India. All three countries have become
major destinations for aluminium scrap that doesn't meet China's
increasingly stringent import purity thresholds
U.S. scrap exports to China slumped from 831,000 tonnes in
2017 to 315,000 tonnes last year but shipments to those three
Asian destinations rose from 312,000 tonnes to 833,000 tonnes
over the same period.
A new off-shoring business, taking lower-grade scrap and
re-melting it into alloy, appears to be emerging.
Something very similar has been taking place in the copper
sector and in both cases the root cause is China's clampdown on
lower grade scrap.
While the country is sucking in other forms of aluminium,
scrap imports so far this year are running 51% lower than in
2019. A new system for imports of higher grade material is
pending but it may be redundant if global scrap flows
Higher-than-historical alloy import rates may be here to
stay, even if not at the current arbitrage-inflated levels.
The flip side to these higher imports is the simultaneous
decline in China's exports.
Exports of all forms of aluminium have fallen 20% so far
this year. Shipments of "semis", the largest component of
China's exports, fell by 16% to 2.6 million tonnes in
This is to be expected given the drop-off in demand in the
world outside of China, particularly in aluminium intensive
sectors such as automotive and aerospace.
Exports should pick up again once demand comes back,
particularly since Chinese smelters are ramping up production to
benefit from the Shanghai price rebound.
But China's export markets are also being disrupted by
proliferating anti-dumping duties.
The decision by Zhongwang Holdings, the world's
second-largest producer of aluminium extrusions, to scale back
its European office may have been due to the pandemic but, as
one employee posted on social media, new anti-dumping
investigations on Chinese products played a part too.
Lacking co-ordinated international action to tackle China's
history of oversupply and massive exports, ever more countries
are erecting barriers to Chinese products.
This trend seems set to harden amid talk of carbon borders,
a further potential tariff barrier for China's coal-hungry
China's once-in-a-decade aluminium trade inversion is first
and foremost down to the arbitrage window that opened in the
That was a market disconnect between Shanghai exuberance and
But more profound realignments are taking place at the scrap
and alloy section of the global supply chain. Meanwhile, the
de-globalisation trend is still building with China and its
dominance of metals such as aluminium centre stage.
The current disconnect in China's aluminium trade may soon
pass but there are potentially bigger ones still building.
(Editing by Elaine Hardcastle)