Thursday, 8 November 2012

China’s copper mountain

China’s growing copper fetish

China’s copper mountain continues to build. Over the past month Chinese bonded (as in copper inventories in Chinese warehouses that are yet to pay VAT) and SHFE copper inventories have risen to record high levels, according to Goldman. Anyone with new pics of the phenomenon will be rewarded with an Alphaville mug (probably).


Here’s why they say all this copper-hugging is going on (our emphasis):
Downstream de-stocking: Chinese refined copper demand did not pick up significantly in late 3Q12 and early 4Q12 as would normally be the case, partly reflecting the destocking cycle in the downstream end-use sectors (including air conditioners and automobiles). This is expected to end by 1H13.
Higher Chinese refinery utilisation: Chinese copper smelters and refineries ramped up output in October, with average utilization rates rising to 93%, the highest for the year.
Over-importing owing in large part to ‘financing deals’: Chinese refined copper net imports rose by 73% yoy ytd September, averaging 265ktpm, moving well above average requirements of c.225kt per month. As such, Chinese copper inventories have risen sharply this year (primarily at bonded warehouses), despite a negative Chinese copper import arbitrage (Exhibit 2). Since the import arbitrage is not attracting extra metal (over and above requirements), financing deals, which depend on the positive differential between domestic and foreign interest rates, are the likely culprit (in line with anecdotal evidence).
And while China has been over-importing in recent months, Goldman also make the point that ex-Chinese LME stocks have not drawn down (unlike earlier in the year). That, they say, points to ex-Chinese demand weakness.

All of which, along with obvious macro woes, has seen the copper price kick downwards, from around $8,400 per tonne in mid September to near $7,600 per tonne now, with little in the near-term suggesting a recovery. Heck, Goldman’s metal team is even holding out hope of an early deal on the US fiscal cliff.
Lacking that, they reach out to a 6-month horizon in search of an uptick in copper prices. We’ll put the full note with attendant longer-term optimism in the usual place.
Related links:
China’s literally ground-breaking copper inventories – FT Alphaville
China is being buried alive in copper – FT Alphaville
The ‘Tin Man’ and the ‘Johor shuffle’ – FT Alphaville

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