Should Record Copper Inventory in China Worry Freeport Investors?



Copper inventory

Previously, we’ve seen that China’s copper imports have been quite robust over the last few months. Copper producers including Freeport-McMoRan (FCX), Rio Tinto (RIO), and Turquoise Hill Resources (TRQ) benefit from higher Chinese copper imports. However, higher imports have not been matched by similar buoyancy in copper demand. The impact is visible in China’s copper inventory as we’ll explore in this part of the series.

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Record inventory

Copper inventory in the SHFE (Shanghai Futures Exchange) has reached record highs this month. As of March 10, SHFE had 350,000 metric tons of copper inventory. Copper inventory has risen ~45,000 metric tons in the last week. On a year-to-date basis, SHFE copper inventory has increased by 173,000 metric tons. Rising copper inventory tells us that copper imported by China is probably not going to end users but is getting stockpiled in the SHFE.

Bonded stocks

However, there’s another portion of copper inventory in China that’s lying in tax-free zones. These stocks, which are popularly called bonded copper stocks, have been falling for quite some time now. China’s crackdown on financing trades coupled with falling Chinese interest rates and a volatile renminbi have reduced the appeal of these financing trades. We don’t get official data for the bonded stocks but according to Bloomberg estimates, China’s bonded copper stocks stood at 380,000 metric tons as of the end of February.

Interestingly, SHFE copper inventory has historically been much lower as compared to bonded copper stocks as well as LME (London Metals Exchange) copper inventory. However, SHFE copper inventory is now more than LME copper stocks and within range of bonded stocks.

In the next part, we’ll explore whether China’s State Reserve Bureau is also stockpiling copper. You can also consider the Materials Select Sector SPDR ETF (XLB) to get diversified exposure to the materials sector. Together, Freeport and Newmont Mining (NEM) form ~5.7% of XLB’s portfolio.


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