Rising inventories, both on the LME and in China, point to a surplus of material, Steve Hardcastle of Sucden Financials told Reuters. The copper market was in deficit last year to the tune of 300,000-400,000 tons, but this year it could be in balance. HSBC, in a recent quarterly report, says the opposite: the refined market was in surplus last year of 91,000 tons, but will be in deficit this year of 78,000 tons. As the bank observes, copper demand remains woefully under-researched.
Estimates of supply and demand are made up largely from major industry consultancies, which in turn are largely based on apparent, rather than measured, demand. What is clear is that copper buying by end users has slowed in China, the world’s largest consumer; as prices rose through $9000 to $10,000 consumers withdrew. Whether they will come back if prices fall, offering support to a further fall is uncertain. What is clear is that this combination of rising inventory levels and lower-than-anticipated Chinese demand coupled to a lack of SHFE-LME arbitrage is resulting in the relocation of metal from bonded warehouses in China into LME warehouses in the Asian region.
As Standard Bank advises in a recent note to investors, metal bound for China also appears to have been diverted into LME warehouses amid lackluster nearby demand. Even with a dramatic rebound in Chinese demand for copper, the excess metal in the system will still take some time to be worked through. Assuming Chinese demand picks up, there remains an overhang of SHFE metal, running some 70 kt above the 5-year average, Chinese bonded warehouse stocks, some 200-300 kt above normal levels, and LME on-warrant inventories, which are some 220 kt above the 5-year average. If demand doesn’t pick up as expected in the normally stronger Q2 period, then stocks could rise further and inevitably put further pressure on prices.
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