(The opinions expressed here are those of the author, a columnist for Reuters)
* Global exchange stocks of copper: tmsnrt.rs/1WGa8t2
LONDON, Feb 23 (Reuters) - Note to global copper producers. If you have any surplus metal and you’re not already doing so, please send it to China.
The country is currently sucking up copper at a faster rate than even during the boom years of rampant infrastructure spend.
Quite evidently, reports of the death of the Chinese manufacturing sector may have been slightly exaggerated.
But there is also no doubt that China is embarked on a massive stock-building exercise.
The most visible part of this phenomenon has been the surge in inventory registered with the Shanghai Futures Exchange (SHFE), which now comfortably exceeds that in the London Metal Exchange’s (LME) global warehouse network.
SHFE stocks have just hit a historic high. LME stocks are at a one-year low and still falling.
Such a mass relocation of inventory may be broadly price neutral but on current trends is going to generate very divergent outcomes in terms of market structure.
January’s imports of refined metal may have been down on December but that month’s tally of 423,000 tonnes was the highest on record.
On a year-on-year basis last month’s net imports of 315,000 tonnes were up almost 16 percent.
Moreover, January’s net figure dwarfs average monthly rates of 256,000 tonnes in 2009, 239,000 tonnes in 2010 and 223,000 tonnes in 2011, three years of frenetic Chinese construction activity as Beijing sought to offset the impact of the Global Financial Crisis.
True, there may be some distortion arising from the timing of the Lunar New Year holidays in China but this trend of super-strong imports has been running for several months. Last year’s imports of 3.68 million tonnes were also a record high.
Imports of copper concentrates, meanwhile, are also running at an extremely fast pace.
The first time monthly imports of the raw material exceeded 1.0 million tonnes (bulk weight) was in September 2013 and it was a fairly rare occurrence until last year.
January’s tally of 1.17 million tonnes marked the sixth straight month of seven-figure tonnages.
Higher concentrate imports should, all other things being equal, translate into lower demand for imports of refined metal.
All other things, however, are far from equal.
The simple explanation for why imports continue to boom is that the arbitrage has for some time remained largely import-positive.
But what are the drivers keeping that arbitrage open and fuelling China’s undiminished appetite for imports?
Chinese copper usage may have lost a lot of its growth momentum as the country’s real estate bubble gradually deflates and the broader manufacturing sector loses its previous white heat, but it hasn’t imploded.
Moreover, Chinese smelters’ reaction to low prices, a combination of production cuts, reduced commercial sales and distress sales to the government stockpile manager, the State Reserves Bureau, may have created a temporary shortage of commercially available metal.
But it is also clear that much of what is currently entering the country is piling up in inventory.
SHFE stocks have increased by almost 100,000 tonnes since the start of January and at a current 276,904 tonnes are at record highs.
There are also some 400,000 tonnes of copper sitting in the statistical shadows of Shanghai’s bonded warehouse zone.
There is also, it is probably fair to say, a lot more still lying in even greater statistical darkness in mainland warehouses.
And that’s not even counting the stuff that is being held by the secretive State Reserves Bureau, the true heart of statistical darkness when it comes to Chinese copper stocks.
In part, such stock-building is a normal reaction to low prices. China is still a net consumer of copper and like any buyer will be incentivised to accumulate inventory during periods of price troughs.
An added incentive may be coming from expectations of further yuan devaluation, which would make dollar-denominated metal more expensive.
Of course there’s no point in accumulating inventory if you expect your own customer demand to collapse.
If there’s a positive from these figures in terms of the state of the Chinese manufacturing engine, it’s that many Chinese players are keeping the faith that things are only going to be get better, or at least not appreciably worse.
Graphic on global exchange stocks of copper:
...BUT NOT ON THE LME
It’s not the first time SHFE stocks have exceeded those held by the LME but the last time was in 2005, a year of chronically low stocks when LME inventory fell below 30,000 tonnes.
And the differential with the SHFE was never more than a couple of thousand tonnes back then.
It is currently over 70,000 tonnes and that’s just at a headline basis.
Stripping out the amount of metal earmarked for physical load-out, available LME stocks are actually a lot lower than the headline total of 203,700 tonnes.
After another 7,750 tonnes of net new cancellations yesterday, available LME stocks, or “open tonnage” as its known in LME parlance, stands at just 162,300 tonnes.
Both headline and open tonnage stocks have been trending lower since the start of this year, in sharp contrast to what’s happening in China.
Such divergence in Shanghai and LME stocks trends has happened before but rarely so starkly.
And while that may not in itself mean much for the outright copper price, it does have significance in terms of respective spread structures.
The SHFE is currently trading in contango. The LME is currently trading in backwardation with cash prices commanding a premium over forward prices.
That LME backwardation looks fairly benign right now. The benchmark cash-to-three-months spread CMCU0-3 was valued at a modest $3.50-per tonne backwardation at Monday's official close.
That may be due to an absence of any dominant position holder, although one entity has been popping in and out of the LME’s market positioning reports for some time.
History suggests, however, that LME open tonnage is approaching levels where the spreads can get stormy, particularly if there are significant short positions to be rolled, as seems likely given the recent outright price action.
A more acute backwardation may disrupt the flow of copper into China but until it does, surplus metal is still heading to the market of first resort.
Editing by David Evans
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