Copper Scene in China Crucial – and Confusing
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18th November 2010.
A few days ago, we ran an In The News item about how demand for copper in China is pushing global prices for the metal to surprisingly close to their previous record high.
18th November 2010.
A few days ago, we ran an In The News item about how demand for copper in China is pushing global prices for the metal to surprisingly close to their previous record high.
As noted in that piece, copper is the single most important metal for rapidly industrializing and prospering countries.
Why ???
Because the average single-family home uses 439 pounds of copper in construction,
an air conditioner uses 52 pounds and a refrigerator uses 4.8 pounds.
The average vehicle contains more than 50 pounds of copper stretching nearly a mile.
China’s place in the global copper market can’t be overstated.
World consumption of copper has increased 14.9 percent from 2003-2009.
But remove China from the equation and world copper consumption swings in the opposite direction
to a 14 percent decline over the same time period.
In this context, it’s not surprising to see copper consumption there is reported to be higher than expected this year,
because of strong demand precisely from makers of autos, air-conditioners and electronics.
Refined copper consumption is estimated to grow to 6.8 million metric tons this year, some 11.5 percent.
This is more than forecast for an expansion of 10.7 percent in the middle of this year,
and 8 percent at the beginning of 2010,
Yang Changhua, a senior analyst Beijing Antaike Information Development Co., said
in a speech at the China International Copper Conference in Ningbo earlier this month.
“The investment stimulus package is still playing a role this year, supporting demand growth,” according to Yang.
Output of the refined metal in the world’s largest producer will probably grow 10 percent, to 4.55 million tons, this year,
resulting in a deficit of 2.25 million tons, according to Antaike.
The deficit may widen to 2.44 million tons in 2011,
based on an assumed 8 percent increase in consumption and
a 7.7 percent rise in output, Yang said.
Which, of course, means that China is going to have to get that copper from somewhere,
namely the outside world … 😉 …
If this is indeed the case, then it makes sense to argue global copper prices are likely to continue rising.
BUT …
Then we hear copper inventories in Shanghai bonded warehouses,
where traders store shipments before duties are paid,
have at least doubled in the past three months
as rising prices deterred purchases by Chinese users, traders and analysts said.
Stockpiles in Shanghai bonded warehouses have climbed to as much as 300,000 metric tons, up from about 150,000 tons in late July,
according to Na Liu, Scotia Capital’s China Strategy Advisor.
But Guosen Futures Co. trader Lu Shaohan calls this number “conservative,” estimating the inventory level to be closer to 500,000 tons.
“We hear some warehouses are full and can no longer accept more metal,”
said Fu Bin, an analyst at Jinrui Futures Co., a unit of Jiangxi Copper Co., China’s biggest producer.
“Given the negative arbitrage recently, importers will lose money if they bring the metal into China.”
Despite this copper in London traded at a premium to futures in China has risen 18 percent in the past three months.
This compares with a 17 percent gain in Shanghai – but – prices there include a 17 percent value-added tax and import fees.
Three-month delivery metal on the London Metal Exchange gained as much as 1.6 percent to a 28-month high of $8,800 a ton earlier this month,
trading within 1.6 percent of its record $8,940 reached in July 2008.
Copper for February-delivery on the Shanghai Futures Exchange climbed to 68,520 yuan ($10,276) a ton, the highest price since March 2008.
So what to make of the warehouse situation ???
“Domestic stockpiles in warehouses have been increasing as the rally in prices caused buyers to stay away and run down inventories,”
said Wen Jinghai, an analyst at Bohai Futures Co.
“It hasn’t been profitable to import copper so even metal that has been shipped as part of long-term orders
may be sitting in bonded warehouses waiting for the arbitrage window to open.”
Arbitrage traders and importers profit by buying metal in London and selling it in Shanghai, exploiting the gap in prices.
“There’s investment demand and physical demand,
and copper is now being driven almost solely by investment demand
as consumers don’t want to buy at these prices,” said Hoohy Futures Co. analyst Gao Jingsong.
Falling premiums and rising treatment fees suggest supplies are enough to meet current physical demand,
according Ren Gang, an analyst at Maike Futures Co.
Copper premiums paid by Chinese importers over the London Metal Exchange cash price
have dropped to around $80 a ton on a cost, insurance and freight basis to Shanghai,
from around $120 at the beginning of October, according to traders and analysts.
At the same time, spot fees paid to copper smelters in China by mining companies for turning ore into refined metal
have nearly tripled to $80 a metric ton and 8 cents a pound.
“This situation will only be temporary as China remains a net copper importer,” said Maike’s Ren.
“Physical buyers will have to return to the market once their inventories are depleted.”
If they do, then we can be pretty sure China’s macro-economic juggernaut is going to continue.
If they don’t, then we MAY have to contemplate the possibility of a potentially problematic economic situation in China,
which would be a bad thing both for them AND the rest of the world.
David Caploe PhD
Editor-in-Chief
EconomyWatch.com
President / acalaha.com
