(Andy Home is a Reuters columnist. The opinions expressed are
By Andy Home
LONDON, April 28 It's been a while but the
ultimate copper buyer is back in town.
China's State Reserves Bureau (SRB), which manages the
country's strategic commodity stockpile, has just skimmed a
couple of hundred thousand tonnes from the mountain of copper
sitting in Shanghai's bonded warehouse zone.
As ever with this secretive entity, it's difficult to pin
down exactly the volumes involved but there's no doubt that the
SRB is back in the buying seat and back in a big way.
That has all sorts of implications for market balance this
year and says a lot about what the world's most powerful copper
buyer thinks about the current price.
PULLING THE TRIGGER(S)
The first question, as ever with an entity that takes such
care to conceal its movements in the market, is what exactly has
the SRB been doing.
The current programme seems to have three distinct
The first, and the one that triggered last week's headlines,
was a raid on the Shanghai bonded warehouse zone when the copper
price collapsed to a near four-year low of $6,321 per
tonne around the middle of last month.
The bureau is thought to have bought at least 200,000 tonnes
and up to as much as 350,000 tonnes from banks that had metal on
their books from expiring finance deals.
This appears to have been an opportunistic move to
capitalise on low outright price and on low physical premiums,
the latter resulting from the accelerated build in bonded
warehouse stocks in the early months of this year.
The Shanghai swoop is in addition to a purchase in January
of around 300,000 tonnes of metal in the form of term contracts.
Offsetting these two streams of buying will be an expected
sale of around 200,000 tonnes of older stock some time later
this year, part of the SRB's "normal" stocks-rotation scheme.
The best estimate, therefore, is that the SRB will be a net
buyer of around 300,000 tonnes this year, albeit with the
potential to add more against its 2015 budget target if the
price is right.
It may well have been a buyer last year as well, although
there is a strong suspicion that the SRB was merely mediating
the purchase of metal, both copper and nickel, for a Chinese
BUYING UP THE SURPLUS
Quite evidently, the physical purchase of around 300,000
tonnes of copper has significant implications for commercial
market balance this year.
The current analyst consensus is that this will be a year of
surplus as last year's surge in mine production cascades down
the supply chain into the refined market.
But the surplus is not expected to be overwhelming.
The most recent Reuters quarterly poll of analysts yielded a
median expectation that copper would be in surplus to the tune
of 228,000 tonnes this year. MKTBAL-ACL
The full range of estimates from the 16 analysts who
submitted a 2014 market balance estimate runs from a deficit of
90,000 tonnes to a surplus of 519,000 tonnes.
These are marginal outcomes in a 20-million-tonne global
marketplace and allow for little statistical cushion against the
physical removal from circulation of around 300,000 tonnes of
Moreover, analysts are steadily trimming their surplus
estimates. The median expectation in the previous quarterly poll
in January, for example, was a 2014 market surplus of 260,500
This represents a collective reassessment of likely mine
supply growth this year after the 8 percent jump seen in 2013.
Supply disruption to existing operations is back in focus
after a surprisingly uneventful year by copper's standards.
Freeport McMoRan has already had to "defer", to use
its word, around 125 million pounds (56,700 tonnes) of
production at its Grasberg mine in Indonesia due to a change in
the export tax regime.
It and fellow Indonesian copper miner Newmont Mining
are officially upbeat that a deal will be reached soon, allowing
for a return to normal production rates. But every week without
one means more copper lost, or "deferred".
Secondly, last year's supply surge largely came from
brownfield expansions. This year's will come from new mines with
a higher risk of start-up problems, already foreshadowed with
guidance downgrades and timeline delays at mines such as Oyu
Tolgoi in Mongolia and Caserones in Chile
This year's surplus, in other words, is a shrinking target
and while the siphoning of several hundred thousand tonnes into
strategic stocks doesn't alter the underlying production-usage
numbers, it has the capacity to affect commercial market
balance, the amount of metal available at any one time.
THE PRICE IS RIGHT
That is a decidedly bullish development, as is the implicit
price marker just placed by the Chinese government.
The last time the SRB entered the copper market in a big way
came in 2009, when it was incentivised by the post-crisis
collapse in the copper price to below $3,000 per tonne.
The fact that it evidently now regards a price below $7,000
as an entry point says a lot about how much the copper market
has evolved in the last few years.
They have been years of rapid cost inflation, lifting the
cost curve to the point that analysts at Macquarie Bank now
estimate 10 percent of Chinese mine production "should be
unprofitable at prices of $6,800 per tonne or less".
("Commodities Comment", April 15, 2014)
Moreover, the pipeline of new supply has been significantly
diminished by the combination of lower prices and the new
shareholder-mandated austerity among the world's biggest natural
Beyond the next year or so, and the exact timing is still a
topic of hot debate, the copper market is widely expected to
revert to a chronic production shortfall with all the bullish
price implications you'd expect from such an assessment.
The SRB's stepped-up activities in the copper market this
year strongly endorse such a view. Of course, the bureau's
decision to pull the buy trigger renders such a bullish outlook
The world's most powerful copper buyer, after all, has just
told us where it thinks the medium-term price floor is in this
(Editing by Dale Hudson)