Chinese copper inventory
Previously, we noted that copper prices have come down by ~6% so far in 2015. One of the possible reasons for the fall in copper prices is a massive increase in the Chinese copper inventory. In this article, we will analyze the trend in copper inventories in China. These inventories can be divided into two parts: warrants and cancelled warrants.
Warrants are like a bearer document. The holders of these warrants can take delivery of aluminum from a designated warehouse. All metal that enters the warehouse is on warrant.
The warrants are canceled when the bearer of the warrants requests the physical delivery. These warrants are then no longer available for trading. It’s important to note that the inventory levels in warehouses are not affected by cancelled warrants. The inventory levels are affected only by physical movement of the metal.
Only the on-warrant metal is available for fresh delivery. Instead of looking at the total copper inventory, it’s better to look at the on-warrant copper inventory.
The above chart shows the on-warrant copper inventory with the Shanghai Futures Exchange. The on-warrant inventory has increased by almost 2.5 times as compared to the 2014 closing levels. Copper inventories tend to increase in the start of the year, due to the Chinese lunar year holidays. However, the quantum of increase this year has been massive.
Rising copper inventories in China is negative for copper producers like Freeport-McMoRan (FCX), Teck Resources (TCK), Glencore Plc. (GLNCY), and Newmont Mining (NEM). FCX currently forms 3.25% of the SPDR S&P Metals and Mining ETF (XME).
Along with inventories in China, investors should also keep an eye on London Metal Exchange inventories. We will discuss this in detail in the next part.