Lest anyone take a look at falling LME copper inventory levels and assume demand is on the rise, an article by Reuters’ Andy Home explores in more detail where the metal is going and what may be behind the apparent demand.
China’s copper imports accelerated to a 20-month high in November, with 452,000 metric tons of refined metal, alloy, anode and products flowing through customs last month. Prior to November, the annual imports were down on 2010 by almost 10 percent, but as the LME price has fallen, imports have accelerated.
Most of the increased demand has been driven by refined metal rather than scrap, although scrap imports have remained strong. Also, the imports aren’t sitting in bonded warehouse as they did in 2010, only for the metal to flow back out again when demand failed to rise and global prices made re-export a more attractive proposition.
Some are looking at the flow of copper through the bonded Shanghai warehouse system — and payment of the 17-percent VAT — as evidence that the metal is being consumed. In 2009/10, metal was imported but held in bonded warehouses, only for 144,000 tons to flow back out again early this year when prices peaked, credit became tight and demand remained lackluster.
In the current situation, even Shanghai bonded stocks are being drawn down, falling by about 50,000 tons from last month, while regional LME stocks have all been drawn down. The article explains that inventory at six LME warehouses in South Korea, Singapore and Malaysia have fallen from 160,000 metric tons at the end of September to just 55,350 metric tons now, with an additional 19,300 tons earmarked for withdrawal as cancelled warrants.
However, as we have written on several occasions recently, while Chinese GDP is still robustly positive at about 8.5 percent, it is down on last year’s 10+%, with falling PMI numbers pointing to a cooling of demand growth. Rapidly rising copper consumption therefore runs contrary to all other indicators and taking copper’s speculative role in the Chinese supply chain, it is more likely that we are seeing a mini-repeat of the 2009 re-stocking when China imported massive volumes of all metals to replenish stocks and take advantage of historically low prices.
What it probably does say is that Chinese consumers and speculators do not see copper prices falling any further from current levels; that they consider recent numbers a good buy and that they have confidence in the Chinese economy to consume this metal during 2012. Positive, but not a major buy point.
So while falling LME stock levels provide support for LME prices, buyers should not assume this means prices are inevitably about to rise. More time is required to establish whether this is re-stocking or genuine end-user consumption. Our guess is it’s re-stocking, and will run its course by the early New Year.