Chinese copper imports
Previously, we saw that China’s copper imports have been strong 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 Chinese copper imports haven’t been matched by similar buoyancy in copper demand. The impact is visible in China’s copper inventory.
The copper inventory in the SHFE (Shanghai Futures Exchange) reached record highs last month. As of March 31, the SHFE had 368,725 metric tons of copper inventory. Although the copper inventory fell slightly towards the end of March on a year-to-date basis, the SHFE copper inventory increased by more than 190,000 metric tons. The rising copper inventory tells us that copper imported by China probably isn’t going to end users. It’s getting stockpiled in the SHFE.
China’s bonded copper stocks, as estimated by Bloomberg Intelligence, rose to the highest level since August 2015. You can see this in the above graph.
However, a Financial Times report gives another angle to the debate over Chinese copper imports. According to the Financial Times, citing Barclays’ analyst Vivienne Lloyd, higher imports could also signal collateral financing. Previously, a Financial Times report attributed rising stockpiles to deliveries made by Chinese smelters. According to the Financial Times, citing unnamed traders, many Chinese smelters wrote derivative contracts on copper. As copper prices rose, smelters stood to lose money on these contracts.
The higher copper inventory in the SHFE gives the impression of weak copper demand. It led to the downward price action in copper. After all, more Chinese copper imports were the key driver of copper prices this year. With strong Chinese copper demand under the scanner, copper prices gave away some of its recent gains.
We’ll get China’s March trade data on April 8. It will be interesting to see if Chinese copper imports were strong last month as well. Meanwhile, physical markets seem to reflect soft Chinese copper demand. We’ll discuss this in the next part of the series.