I love when clients call to get the skinny on a particular market. They always have some nuggets of interesting information to share and yesterday’s call was no exception. Two questions came up: what’s our take on the aluminum market and what’s our take on the copper market. Ironically (or perhaps not), we have gone on record with our opinion on both markets. In both cases, we felt the hype had received more play than the fundamentals. You can read our story on copper here and on aluminum here.
So when our client asked what did I think about China’s SRB now selling some of its copper strategic reserves into the domestic market, I started to chuckle. Let’s review the background because it explains why copper prices will drop. First, China’s SRB has made public announcements for many months that it has and will continue to buy metals for its strategic reserves. Some have felt that the Chinese had made overseas purchases to rid itself of US dollars but we somewhat debunked that notion in a post from Monday, Is China Using its US Dollar Reserves to Stockpile Metals? Essentially we felt that the amount of strategic buying at an average cost (in this case copper of $4250/ton) would not convert much more than $5b of China’s $1.9t of US dollar holdings. If the Chinese had acquired approximately 300,000 tons of copper offshore (and indeed multiple media outlets report this number) and now want to sell 20,000 ” 50,000 tons to the local market, according to local reports and Standard Bank’s report of April 21, what can we conclude?
If we assume the SRB seeks to source cost-effectively, their intent to sell into the domestic market means they can sell some of their lower-priced fixed contract material (bought late last year or earlier this year) into the domestic market (remember the copper price on the SHFE has been higher than the copper price on the LME) and replenish stock with materials that they will go out to buy on the spot market. Talk about making a market! The price of copper has increased by some 60%+ this year on the back of China demand. But as we have said many times, demand does not exist. Instead, buying exists in the form of SRB purchases. Now that copper prices have increased so much, the SRB may want to cool the copper jets so that it may once again re-stock at lower prices.
Round and round we go.