* State reserve buys could help sop up small supply glut
* Purchases won't change fundamentals as demand remains
* May signal that prices have bottomed, spurring restocking
By Polly Yam and Melanie Burton
HONG KONG/SINGAPORE, Nov 7 China's plan to buy
base metals for state reserves in an effort to cushion domestic
smelters from slowing economic growth would support prices but
would not significantly reduce bulging stockpiles, traders and
analysts said on Wednesday.
China is the world's biggest consumer of base metals, but
demand has faded this year as exports have weakened, pushing
stocks of copper and aluminium to near-record highs and driving
some smelters into loss-making territory.
Any buys for state reserves would take up some of the slack
in China's supply chain, analysts said, rather than igniting
demand, with purchases planned on a much smaller scale than in
the wake of the 2008/09 financial crisis.
"It's a plea for some help. Obviously the smelters have
requested some official assistance and we know stocks have gone
up. Ostensibly it is to help the cash flow of the smelters,"
said analyst Robin Bhar of Societe Generale.
"On copper, it is difficult to see the move lifting prices
on a sustained basis, but it probably means the downside is
restricted. On aluminium, which is a much bigger market, it is
neither here nor there."
Sources told Reuters this week that China's influential
state planner could revive a stockpiling plan as soon as this
month to buy around 400,000 tonnes of primary aluminium ingots
and 165,000 tonnes of refined copper cathode for state reserves.
This volume equates to around 8 days of consumption for
refined copper and nearly 7 days for primary aluminium, and
compares to China's current stocks of more than one million
tonnes of both copper cathode and aluminium ingots.
INVENTORIES NEARLY DOUBLE END-2011 LEVEL
The stocks include metal held by Shanghai Futures Exchange
warehouses, bonded warehouses, producers and end-users.
"Inventories hanging over the market are mainly bonded
warehouses, estimated around 750,000 tonnes, compared with about
300,000 back in end-2011," Macquarie analyst Bonnie Liu said in
a note this week, adding that fourth-quarter copper orders had
been almost flat with the third quarter.
About 800,000 to 900,000 tonnes of refined copper cathode
was stocked in bonded warehouses in Shanghai and the southern
province of Guangdong, traders estimated last week.
The state purchase looks tiny against the market's annual
consumption of more than 21 million tonnes of primary aluminium,
"I don't think the purchase of aluminium would have a big
impact," said a source at a large aluminium producer who did not
want to be identified in the absence of authority to speak to
"Domestic prices may rise one or two days only. The market
now is over-supplied and demand is far behind supply growth."
Markets are hoping Beijing's new top rulers will announce
stimulus measures following the once-in-a-decade leadership
change set to be ushered in by a Communist Party congress
beginning on Thursday.
Although China racked up annual GDP growth of 7.4 percent in
the third quarter of 2012, this was its slowest pace since the
depths of the financial crisis in the first quarter of 2009.
The extra demand from the state purchases might lead
investors and end-users to conclude prices had bottomed and the
time for restocking was near, some analysts in China warned.
"A purchase by the State Reserves Bureau would have
psychological impact," said Jing Chuan, chief researcher at
Citic Futures, referring to high domestic prices of copper and
aluminium, which resulted in record imports in 2009.
"We saw that in 2008/09, when the SRB buying pushed up
prices strongly, although it did not change the real supply and
A sales manager at a Chinese copper smelter said the
purchases could signal the domestic market that prices had
bottomed, encouraging speculators and end-users to build stocks.
Unlike the launch of the inaugural stockpiling in 2008, the
SRB has not officially announced current purchase plans.
In December 2008 it said it planned to buy 1 million tonnes
of aluminium, 400,000 tonnes of copper and a total of 400,000 of
lead and zinc from domestic smelters over three years.
But it had only bought 235,000 tonnes of copper, 590,000
tonnes of primary aluminium and 159,000 tonnes of refined zinc
by the end of that round.
(Editing by Clarence Fernandez)