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Chinese Copper Inventory at 1-Year Low

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Jul. 17 2015, Updated 3:06 p.m. ET

Chinese copper inventory

Previously, we discovered that LME (London Metal Exchange) on-warrant copper stocks have increased in the last few days. In this part of the series, we’ll discuss the recent trend in Chinese copper inventory, which recently plummeted to a one-year low.

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On-warrant stocks decline

The previous chart shows the trend in on-warrant copper inventory with the Shanghai Futures Exchange. As you can see, on-warrant stocks declined by ~70% in June. This was preceded by a decline of more than 13% in May. In April, on-warrant copper inventory fell by more than 50%.

You’ll recall that on-warrant stock is the amount of inventory that’s available for delivery. Warrants are cancelled when the holder requests delivery. Cancelled warrants aren’t available for trading, though technically this supply forms part of the total inventory at the warehouse.

Positive for the copper industry

A drop in on-warrant inventory means that more metal is getting booked for delivery. This is generally associated with 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 holidays, inventory levels start to decline.

Meanwhile, there are reports that several Chinese (FXI) (MCHI) copper smelters have been shut down for maintenance. China’s import of copper ores and concentrates—which is further processed into refined copper—fell by ~5% month-over-month in May. This has raised fears of a slowdown in Chinese copper demand.

A slowdown in Chinese demand for copper is negative for producers including Freeport-McMoRan (FCX), Teck Resources (TCK), and BHP Billiton (BHP).

Meanwhile, Chinese copper imports point to a strategic shift. We’ll discuss this in the next part of this series.

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