In case you haven’t heard there’s been a spike in copper prices over April. Note the following chart of LME 3M copper prices from a recent Standard Chartered note:
The strange thing is, as Standard Chartered points out, the recovery has come against a backdrop of weak demand. Consequently, the analysts feel the price movements come down mainly to two things - China and short-covering (so essentially China). As they explain:
Firstly, China has been importing substantial quantities of copper. In March these reached 297 thousand tonnes (kt) and further strong imports are likely to be recorded in April. A second supportive factor has been short-covering. Data from the Commodity Futures Trading Commission shows that net short speculative positions on US exchanges were reduced by 29% from mid-February to mid-April. We expect both these drivers to fade in the months ahead, but the short-term outlook for copper looks considerably stronger than before.
The biggest impact of which has been seen on LME inventories, which are sharply down in April. As Standard Chartered explain (our emphasis):
There has been a sharp drawdown in LME stocks in recent weeks, despite weak demand in a number of key consuming countries. A 75kt drop has taken place in April so far (see chart 2) – the most significant drop in over a year. While this reduction has taken place across a number of regions (with Rotterdam accounting for over half of the total), we understand that most of this copper is destined for China. This strong buying from China has been reflected in Shanghai prices (see chart 3), which have risen to a high premium over LME. On a three-month basis this rose to a six month high of USD 552/t in the middle of April, before falling to USD 143/t in the final week of the month.
So why is China buying all that copper? Well there has been restocking by fabricators but, according to Standard Chartered, a substantial part of total imports to China, some 350kt out of 748kt, is actually being bought by the State Reserve Bureau (SRB). This supports some theories out there that China is attempting to diversify its reserves in ever more original ways. However, there are other factors driving Chinese demand too say the analysts:
Secondly demand has picked up quickly in recent weeks both for seasonal reasons (Q2 is normally the strong period for demand) and there has been a quick and early response to the government‟s stimulus package. Latest reports suggest that several leading wirerod plants are now running at close to full capacity, a substantial improvement since the start of this year.
Thirdly the scrap market globally is very tight, but China has a particular shortage. Trade data for March shows that imports dropped by 40% y/y or 200kt, a gap which has been partly filled by higher imports of refined copper (see chart 4). Metal Bulletin, a trade magazine, reports that certain grades of high-quality copper scrap are now selling at a 4% premium to the LME, a very unusual situation. The impact of China has been sufficiently strong that it has more than made up for the weakness in other consuming countries. Also copper is now heading back towards its “danger zone” (see chart 5), with prices potentially moving up sharply as LME stocks move down towards 5 days of consumption.
Looking ahead into the second half the analysts feel that while the factors above will diminish, other bullish fundamentals like problems in Chile and the shortage of scrap are likely to come in to compensate, keeping prices buoyant. Going into Q3, however, the restocking effect will likely fade completely, just as a likely supply increase hits the market on new projects coming on stream and the Escondida mine in Chile increasing output. All of which they say should ease the current tightness in the market and drive prices lower.
Related links:
China, the currency factor and copper - FT Alphaville
Forget Treasuries - is copper the future for China? - FT Alphaville
LME copper inventories falling - FT Alphaville
A commodity anchor, or oil as money - FT Alphaville
