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Chinese Copper Inventory Declines Further in May

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Jun. 4 2015, Updated 10:06 a.m. ET

Chinese copper inventory

In the previous part of this series, we saw that on-warrant copper stocks with the LME (London Metals Exchange) dipped 15% in May. In this part of the series, we’ll look at copper stocks in China (FXI). The country is the biggest global copper consumer, eating up more than 42% of the world’s copper production.

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On-warrant stocks decline

The above chart shows the trend in on-warrant copper inventory with the Shanghai Futures Exchange. As you can see, on-warrant stocks declined ~13% in May. Just one month earlier, in April, on-warrant stocks fell more than 50%.

On-warrant stock is the quantum of inventory available for fresh delivery. Warrants are canceled when the holder requests delivery. Canceled warrants are not available for trading, although technically, they form part of the total inventory at a warehouse.

A positive sign

A decline in on-warrant inventory means more metal is being booked for delivery. It’s generally associated with a strong copper demand. Chinese copper inventory tends to build up toward the start of the year. As copper end users ramp up their production after the lunar New Year holiday, inventory levels start declining.

However, this year the takeoff in copper inventory has been a bit late. Nonetheless, the recent downward trend in China’s copper stock bodes well for the global copper industry.

Copper producers like Freeport-McMoRan (FCX), Southern Copper (SCCO), and Turquoise Hill Resources (TRQ) rely heavily on Chinese copper demand. FCX currently forms 4.1% of the Materials Select Sector SPDR ETF (XLB).

Europe is another major copper consumer. In the next part of this series, we’ll look at recent trends in European copper demand.

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