The world's metals producers are still looking to China as the panacea for all ills with the often expressed hope that the country's need to support the domestic metals smelting, refining and steel industries will be the saviour of this sector and supply sufficient demand to support prices in the West. Consequently Chinese data are followed intensely and the latest information suggests that copper, iron ore and steel demand are holding up well - indeed increasing substantially - while aluminium is flat and zinc and lead suffering.

But Chinese data requires interpretation and can be misleading as pointed out by Macquarie's Bonnie Liu in her latest China Commodities Weekly research note, and she concludes that there has to be some doubt that the latest extremely strong figures can be maintained. The notes below are abstracted from Macquarie's  latest China Commodities Weekly and give us some considerable food for thought.

According to the official statistics, Chinese unwrought copper and copper products imports in February hit a record high of 329,311t, up 41.5% MoM and 45.1% above the February 2008 level. For the first two months of 2009, Chinese imports of unwrought copper and semis products were 562,052t, 20.6% higher than in the same period in 2008.

This strong rise in Chinese copper imports reflects the continuing outperformance of the SHFE relative to the LME since the end of 2008, Chinese end users' restocking, SRB (government stockpile buying) and reduced supply of secondary material. The SRB has reportedly bought 300kt of copper to-date, and there is speculation that it could buy a further 600-900kt during the rest of 2009.

Steel and iron ore data for January-February were extremely strong; we are concerned that there are substantial builds in stocks taking place in both commodities.

The latest data on Chinese steel production and steel and iron ore trade at face value suggest a strong recovery in Chinese growth and demand for steel. However, anecdotal evidence from China suggests otherwise. The data imply that a major build in steel and iron ore inventory is under way and that things may soon turn ugly again.

Preliminary data suggest that steel production in February was 40.42mt, up 4.9% YoY and representing an annualised rate of 527mtpa, 25% higher than the recent lowest annualised rate of 423mtpa achieved last

October. Furthermore, there continues to be an ongoing collapse in net exports of steel (net exports were only

160kt in February), and apparent steel demand (production plus net imports) was up 7.6% YoY in thefirst two months of the year.

 Chinese imports of unwrought aluminium (refined ingot and alloy) and semis products in February rose to 60,074t, up 6.6% from January, but 17.4% below the year-earlier level. For the first two months as a whole, Chinese imports of unwrought aluminium and fabricating products were 116,425t, 26.4% below the level for the first two months of 2008, pointing to a drop in aluminium tolling business following the world economic crash since the end of 2008.

Last week, the China National Bureau of Statistics reported January and February production for major industrial metals. The key highlights from the data include: Chinese production of aluminium remained weak following smelters' joint cuts in supply. According to the statistics, Chinese production of aluminium for the first two months of 2009 was down by 18.2% YoY to 1.78mt. Also, alumina output slowed dramatically from the peak in 2008. For the first two months of 2009, Chinese production of alumina was down by 7.5% YoY to 3.23mt. Zinc output fell following joint cuts in supply by smelters at end-2008. According to the statistics, Chinese output of refined zinc for the first two months of 2009 was down by 11.8% YoY to 499,800t. Output of lead for the first two months fell from the peak hit year-end 2008, but was still much higher than a year earlier. For January-February 2009, Chinese lead production rose by 14.3% YoY to 391,900t.

Over the past week, steel prices deteriorated further. Hot rolled coil prices fell by 2% WoW to $431/t, and cold rolled coil prices ended the week at $524/t, ex-Vat, virtually unchanged from the previous week. Rebar prices dropped by 0.9% WoW to $411/t, ex-Vat, while the 20mm plate price was down by 0.7% WoW to 425/t, ex-Vat. Indian 63.5% iron ore cfr and fob prices both remained flat last week at $71/t and $62/t, respectively.

The latest data on iron ore from China are increasingly alarming for ore suppliers. Last week, reported stocks in the Chinese ports rose by 2mt to 64.5mt, bringing the rise to 6.4mt over the past four weeks. In addition, new port export data for Brazil and Australia show that, in February, 82% of all Brazilian ore exports were destined for China (13.1mt out of a total export figure of 16mt) and 79% of all Australia exports went to China (18.8mt out of 23.8mt). In 2007 and 2008, Brazil exported around 40% of its total to China and 53% of Australian ore went to China. Australian exports to China rose by 35.7% YoY in January and February, while exports to other destinations fell by 41% YoY.

Following a collapse in non-Chinese demand, iron ore producers have increasingly resorted to selling in the Chinese market in order to support production. Relatively strong steel production and a mini-collapse in domestic iron ore production have made China a relatively attractive destination. However, the sheer volume of iron ore now coming into China threatens to overwhelm the market, forcing spot prices substantially lower.

As in steel, there are now reports of mounting unsold iron ore and falling spot prices suggesting major oversupply. The export data for the main exporting countries to China suggest that, if anything, March Chinese imports could be even higher.

Given the carnage in steel production and demand and iron ore demand in the rest of the world, the Chinese numbers suggest that China is an oasis of tranquillity.

However, this may prove to be a mirage, Macquarie concludes, and these numbers appear set to deteriorate in the second quarter.

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