(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON Feb 17 China is once again exerting a
powerful gravitational pull on the global copper market.
Imports of unwrought copper hit a fresh record high last
month, while those of copper concentrate maintained their recent
The strength of the preliminary figures out last week
It's entirely possible that imports were inflated by the
timing of the Lunar New Year holidays at the start of February.
It's also a highly moot point as to whether China's renewed
hunger for copper is being driven by manufacturing demand or
What's not in doubt, though, is that this accelerated flow
of metal into the country is sucking the rest of the world dry.
Exchange stocks everywhere else are low and, in the case of
the London Metal Exchange (LME), still falling on a daily basis.
The resulting tension is manifest in the tightening of the
nearby spreads in the LME copper contract.
And as long as China gorges itself at the expense of the
rest of the world, that tension is only likely to get worse.
Some sort of adjustment is looming. And it won't be for the
China's imports of copper in refined, anode, alloy and
products form boomed to 536,000 tonnes last month, up 21 percent
from December and up 53 percent from January last year.
Imports of concentrates totalled 1.04 million tonnes,
matching December's record tally.
Graphic on China's refined copper trade:
Graphic on China's copper concentrate imports:
China is soaking up all the raw material the rest of the
world can throw at it, which is a lot more than anything seen in
Concentrates are flowing to China because that is where the
smelter capacity is to treat them.
At some stage raw material will be converted to refined
metal and the much-discussed smelter bottle-neck will be
Until then, though, China is competing for a finite amount
of refined copper with the rest of the world.
And its magnetic pull is a powerful one. The full January
import figures will be released later this month but it's a fair
bet that imports of refined copper either hit a new all-time
monthly high or were very close to doing so.
As ever at this time of year, China's imports can be
distorted by the timing of the Lunar New Year and most analysts
will want to see the February figures to work out just how big
an impact the holidays had.
Then there is the question of whether we're seeing the first
sign of a step-up in term shipments by Chinese buyers opting to
reduce their dependency on the spot market this year.
The jury is out on both counts but right now everything
points to a continuation of an import surge that started around
September last year.
Where is all this metal going?
Optimists would love to believe China's renewed copper
import hunger is a sign of a continued manufacturing boom.
They can point to the higher-than-expected budget allocated
to the State Grid Corporation of China.
The power sector accounts for an estimated 40 percent of the
country's copper usage, so the 13-percent forecast rise in
spending this year has caught the eye of many a bull.
But sharply rising inventory within China suggests that
financing demand for copper is currently just as important as
manufacturing demand in forcing up the import pace.
"Much of the imports were likely driven by financing, as
tight monetary conditions persisted in Q4 and rates rose," wrote
analysts at Barclays Capital ("China key commodity trade, new
records", Jan. 12, 2013).
They went on to explain that "higher borrowing costs
encouraged financing imports to turn copper into credit, despite
weaker Shanghai prices that kept the spot import arb shut."
The net result has been a jump in both visible and invisible
Registered tonnage on the Shanghai Futures Exchange (SHFE)
<0#SCF-DEL-WKL> currently totals 180,341 tonnes, the highest
level since June last year and up by over 54,000 tonnes since
the start of January.
Bonded warehouse stocks, stored away from any exchange in
the statistical twilight, are believed to be also rising.
Barclays, for example, pegs them at a current 600,000 tonnes, up
75,000 tonnes from December.
While metal accumulates in Shanghai, it is fast disappearing
LME stocks <0#MCU-STX> currently stand at 296,025 tonnes,
the lowest level since December 2012.
Most of that metal is in the form of cancelled warrants
awaiting physical load-out. Open tonnage, the true liquidity
base of the LME contract, remains desperately low at just
Inflow has been subdued since the start of the year and,
critically, there has been no real change in that open tonnage
Across the Atlantic, the COMEX warehouse system holds under
16,000 tonnes of copper <0#HG-STOCK>.
The steady tightening of the front part of the copper curve
has, therefore, been unsurprising.
On the LME the benchmark cash-to-three-months period
CMCU0-3 closed last week valued at $30.50 per tonne
backwardation. It hasn't been in sustained contango since
October last year.
Just to add a bit of spice to the mix, a dominant long
position holder has been flickering in and out of the LME daily
reports, although that may say as much about how low open
tonnage is as the size of the position.
Quite evidently, if these trends of rising Chinese stocks
and falling LME stocks continue, there is going to have to be
some sort of rebalancing adjustment.
Any such adjustment will most likely be triggered by a
further tightening of the LME curve, in effect incentivising the
metal currently sitting in China to travel back out of the
Graphic on LME cash tightness and Chinese exports:
This has happened twice in recent years, as shown in the
In the first half of 2011 the process was pretty smooth. A
relatively benign LME backwardation of up $60 per tonne caused a
reverse flow of copper totalling around 150,000 tonnes out of
China into the LME warehouse system.
Much of it is thought to have come from the Shanghai bonded
warehouse zone, where stocks had been rising, just as they are
The adjustment in the first half of 2012, however, was far
more brutal. The LME cash-to-threes backwardation spiked out to
over $100 per tonne and Chinese smelters promptly delivered over
100,000 tonnes in a single month (May) to cover their short
The Chinese authorities relaxed the export rules for some
smelters after that event, which is why exports have become a
regular, albeit relatively small, part of the country's copper
trade dynamic ever since.
A larger stocks relocation, though, will require a bigger
incentive in the form of a higher LME cash price.
At a current $30-40 backwardation the front part of the LME
copper curve is starting to move to a level that has in the past
offset China's gravitational import pull.
So far with no discernible impact on either Chinese export
flows or LME arrivals.
That suggests that a still bigger incentive is needed to
resolve the growing tension between high and rising stocks in
China and low and falling stocks outside of China.
The key question is whether the process will be smooth, as
in 2011 - or violent, as in 2012.
(Editing by Pravin Char)