why imports by China in markets such as refined copper, aluminium,iron ore and lead have declined

The phenomenon could help explain why imports by China in markets such as refined copper, iron ore and lead have declined in the last few months. It also could be a factor behind the recent drop in prices for those commodities.

The Dow Jones-UBS Commodity Index last week dropped to its lowest level since July, before recouping some of its losses. The index is down 9.9 per cent this year.

In April, China posted a significant drop in imports for some commodities, leaving many analysts wondering whether China's appetite for commodities has abated.

That might be the case. And demand could falter if China further tightens monetary policies to slow growth, particularly in heated property markets.

But several analysts, who try to gauge China's actual demand through field visits and data mining, have concluded lately that domestic demand still is strong. In fact, they surmise, commodity imports are declining at least partly because the country and its industrial companies are tapping reserves, possibly because they expect prices to fall further.

Longer term, the Chinese government and industrial companies there are likely to return to the market when reserves are running down or prices get low enough, the analysts said.

Short term, a move to tap reserves is a potentially bearish signal for investors in these commodities, as China's reserves are deep. Analysts at Deutsche Bank said the third quarter may see “considerable pressure” for prices on commodities such as copper and nickel.

Barclays Capital metals analyst Natalya Naqvi wrote last week that China's decline in lead imports may “reflect some running down of domestic stocks”。 She estimated that China has been eating into its lead stockpiles since March.

Still, her note said “macroeconomic data and auto sales in particular have been strong”， and that Barclays expects China to turn into a net importer of lead again “towards the end of the year”， giving prices room to rise. Aluminium and zinc probably also showed a drawdown in stocks recently, Barclays concluded.

China imported record levels of copper in 2009. In April, the International Copper Study Group cited “the potential release” of inventories in China as one of the biggest risks copper prices face this year. That month, China's refined copper imports declined 2.7 per cent from a year earlier, according to the country's General Administration of Customs. “They had imported much more than they could use last year, so they may be” tapping inventories this year, said Ana Rebelo, chief statistician of the group.

After a field trip to China in mid-May, analysts at Macquarie Securities said some end-users of steel, such as auto makers and home-appliance producers, are “choosing to eat into their own inventory, rather than continue to purchase” on the open market.

It is a typical “buyers’ strike” when prices are falling, the analysts wrote. “Why buy steel today when it'll be cheaper tomorrow?”

Confidence that prices may fall further could be behind the Chinese reluctance to buy. Since late April, the benchmark hot-rolled flat steel price has fallen as much as 10 per cent, to $US600 a metric ton in China, according to the Steel Business Briefing, a firm that tracks steel data. Prices for iron ore, a key component of steel, dropped 23 per cent in that period.

The Macquarie analysts concluded that underlying demand for cars and refrigerators in China remains robust and that manufacturers soon will stop draining their own stockpiles and return to the market.

“While we expect further weakness in the near term, we didn't hear anything that fundamentally changes our view on China steel,” they wrote. “We expect conditions to turn around fairly rapidly.” Macquarie estimated China's steel inventory peaked in January, and has since dropped about 15 per cent.

Lower steel prices eventually will result in production cuts at mills and help balance the market, they said. The bank estimated steel demand will recover in the fourth quarter.