We wrote on several occasions earlier this year predicting that the copper market would be coming off amid widespread concerns that China’s economy, and by extension, the rest of Asia’s, was slowing and that high stocks would reduce Chinese copper imports this year.
We can’t claim exclusivity in that prediction; various other metals analysts also called out the copper bulls to suggest the market was entering a slow phase. Well, as we know the copper market has come off and Chinese imports have continued to slow amid lackluster buying. Copper imports have headed steadily downwards, as this Reuters graph shows.
The headline import number, combing flows of refined copper, alloy, anode and products, dropped 3 percent to 254,738 tons in May from 262,676 tons in April. Since April’s figure was the second-lowest since January 2009, imports in May were clearly weak while re-exports of bonded copper were up, hitting an all-time high of 44,595 tons.
Yet at the same time, industrial production growth has remained robust. Figures quoted this week by Standard Bank in a note to investors quote 13.3% year-on-year growth even as the government raised bank reserve ratios a further 50 basis points in the face of a record jump in the May consumer price index (CPI) to 5.5% y/y, and 6.8% y/y for the producer price index (PPI). Beijing’s tightening is having an effect, but still has some way to go to reign in inflation.
Meanwhile, manufacturing remains strong as robust demand for imports of coal and oil suggested power generation and consumer demand remained strong. Coal imports could be higher than demand as generators are likely laying in stocks for the peak summer season and many expect power shortages from hydroelectric sources, but oil is more for fuel- and chemical use than power generation, suggesting underlying consumer demand is remaining healthy.
The eyes of the copper market have been following the import data down and worry that reports of bonded stocks being re-exported to Asian LME warehouses suggests a sharp slowdown in copper demand. A Reuters Shanghai report reprinted in Mineweb states that bonded stocks fell from 550,000-700,000 tons in early April to 350,000 to 500,000 tons this week (the range is because there are no reliable figures; they are estimates at best). This Reuters graph illustrates exchange stock changes:
But as we can see, there is a disconnect above. If bonded stocks are estimated to have fallen from about 700,000 tons to about 500,000 tons, yet only 44.5k tons have been re-exported, that suggests about 150,000 tons have been consumed domestically, hence the fall in imports. China’s copper consumers are in de-stocking mode. When these domestic stocks return to more normal levels, buyers are likely to come back to the world market. If their absence drives prices down in the meantime, that’s a positive in their view.
So if we accept the above logic, the next question is when. Andy Home in a Reuters article explores the main drivers for and against an early resumption of buying. The seasonally strong period is Q2, which we have largely passed through with nary a flicker of demand; Q3 and Q4 tend to be quieter, and with industrial demand possibly impacted by widely expected power rationing in the summer, copper buying may be delayed until stocks are considerably lower, probably later in the year.
Otherwise, copper scrap imports are strong — May’s number was 400,000 tons, suggesting consumers are making do with lower-priced scrap and domestic stocks for now. The conclusion? Copper weakness has not run its course yet, but at some stage before year’s end the world’s largest buyer is likely to re-enter the market and that can only have a bullish impact on prices.