LONDON — When the going gets tough in industrial metal markets, the Chinese get stockpiling.
The province of Yunnan has announced the creation of a fund to facilitate an 800,000-tonne stockpile of just about every industrial metal from aluminum to zinc.
Gansu province is doing the same, with local media quoting a target of 436,000 tonnes of nonferrous metals.
China’s Nonferrous Metals Industry Association (CNIA), representing the country’s top metals producers, has called for a national stockpile program.
The rush to stockpile at times of market stress is a recurring theme in the history of China’s metals sector.
The State Reserves Bureau (SRB) used stockpiling programs to soak up unsold producer inventory during the global financial crisis of 2008-2009, the metals price weakness of 2012-2013 and the cyclical demand trough of 2015-2016.
It’s possible it might do so again, given the impact on China’s metals producers of a COVID-19 demand shock that started in the city of Wuhan and has since spread around the rest of the world.
Metal markets have seized on the latest stockpile plans as a bullish development. Although evidently born out of demand desperation, stockpiling means unsold inventory is withheld from the market and prices are stabilized.
Everything, however, depends on who exactly is doing the stockpiling, and how they’re going about it.
Chinese metals stockpiling comes in at least three distinctly different varieties.
SUPPORT YOUR LOCAL SMELTER
The stockpile announcements just announced by Yunnan and Gansu fall into the first category, which is in essence a financial support mechanism for struggling local producers.
“Right now demand is not so good, production is below cost. Smelters are not making any profit. So they don’t want to produce, and if they’re not producing they may cut jobs,” was how one Guangxi official justified a provincial stockpiling plan as long ago as March 2009.
Guangxi had just announced it would buy 200,000 tonnes of aluminum and 200,000 tonnes of assorted other metals, including zinc, tin and indium, to stave off the demand shock caused by the global financial crisis.
Yunnan Province, then as now, got in early, announcing in December 2008 its intention to build a base metals stockpile of over one million tonnes. Not entirely surprisingly, the first tranche of metal was purchased exclusively from producers with links to the local government.
Several other provinces and cities joined the rush to stockpile in 2009, each tailoring its purchases to help key local employers. Thus, Shaanxi province bought only zinc and lead, the Hunan city of Chenzhou prioritized silver and Ganzhou city went big on tungsten and rare earths.
As in crises past, the new-crisis provincial stockpile schemes are more emergency balance sheet cleanses than long-term inventory planning.
The provincial government sets aside funds – 1 billion yuan ($141.2 million) in the case of Yunnan – to provide interest rate relief on loans covering the cost of holding inventory. The loans are themselves collateralised by the metal being stored.
It is what the Chinese like to call a win-win situation. Smelters’ unsold inventory is taken off their books and transferred to buyers who have to pay minimal costs to hold the metal in expectation of a brighter future.
Such provincial or city stockpile schemes tend to come with a finite running-time. The latest one in Yunnan is valid only for one year.
SUPPORT YOUR NATIONAL INDUSTRY
When things get really tough, the SRB has in the past stepped in to buy up unwanted metal in the guise of “strategic” reserve building.
The original template was the purchase program conducted during the worst of the financial crisis in December 2008 and January 2009, when the SRB bought 590,000 tonnes of aluminum and 159,000 tonnes of zinc.
The initiative was both a way of helping out favored state producers and of setting a floor price in a free-falling market.
All the metal was bought at prices above those then prevailing on the Shanghai Futures Exchange (ShFE), a transparent warning from Beijing to any speculator foolhardy enough to try and push prices lower.
The program was obviously deemed successful as it was rolled out a second time in 2012-2013, when China’s massive post-financial crisis infrastructure boom was fading and metal prices were again falling.
This time the SRB bought 400,000 tonnes of aluminum and 145,000 tonnes of zinc. As before, the normally secretive SRB had no problems with letting it be known that purchase prices were above ShFE levels.
The CNIA tried the national stockpiling idea again during the cyclical metals price trough of 2015-2016 but a plan to buy up to one million tonnes of aluminum never appeared to get off the ground.
Things may have been complicated by the start of Beijing’s reform of the aluminum sector, a campaign aimed at closing “illegal” operators and capping long-term capacity.
It is also possible the SRB simply didn’t want to play ball any more.
Neither aluminum or zinc has ever been on the Bureau’s list of “strategic” metals. It didn’t keep the metal it bought in 2009 for very long. Just one year later it was selling both aluminum and zinc back to the domestic market.
The only metal known to have been purchased in 2016 was copper. The Bureau bought 150,000 tonnes from domestic producers via a closed-door tender.
But copper has always been different.
SUPPORT THE COUNTRY
Copper has for many years been deemed genuinely “strategic” by the Chinese government. It is a vital metal for critical infrastructure such as power grids and China doesn’t have enough of it, relying on imports of both refined metal and raw materials.
Unlike its very public interventions in the aluminum and zinc sectors, the SRB has used discreet market channels to buy its copper. Tonnages and prices have never disclosed.
At the same time as it was propping up China’s zinc and aluminum producers during the global financial crisis, the SRB was hoovering up copper, at least 300,000 tonnes of it in 2009 alone.
Indeed, SRB purchases fed a constant copper market rumor-mill over the 2010-2015 period as the state agency accumulated its stockpile through imports and, once in 2014, by swooping on copper stocks held in China’s bonded warehouses.
Exactly how much copper the SRB holds is a state secret but back in the early 2010s, when the Bureau was a leakier place, there were repeated references to a target of two million tonnes by the end of 2015.
The conspicuous absence of any major SRB activity in the copper market since then, barring the occasional rumor of stocks rotations, suggests that it may well have hit that target.
The metal is locked away in what is truly a long-term strategic reserve, only to be released at a time of supply crisis.
It’s a very different thing from the “stockpiling” being proposed by Yunnan and Gansu. (Editing by Jan Harvey)