By Stuart Burns
The copper market has been characterized by undersupply for years, so rising Chinese copper production and plentiful off-market Shanghai bonded stocks are being seen as an easing of that tightness.
The LME cash to 3-months spread has widened to $34 per ton contango this week, the widest since May 2010 and symptomatic of a market considered to be in surplus or at least in adequate supply - this in spite of record imports into China this year sucking up available metal.
As a Reuters article points out, China imported a record 4.65 million metric tons of cumulative imports of copper in 2012, a 14 percent increase from 2011 and a new all-time record, eclipsing even the 4.29 million tons imported in 2009, a year when imports soared on the back of post-meltdown, bargain-basement prices.
today's copper prices - MetalMiner IndXThe preliminary figures pulled by Reuters aggregate imports of copper in various forms, but it is almost certain that imports of refined metal also notched up a new record of around 3.4 million tons in 2012, they say.
It's no secret that much of that metal has not been directly consumed by copper users, but is sitting in a kind of grey market in Shanghai warehouses, duty unpaid, and though ownership is far from clear - it's likely spread among financiers, traders and possibly speculators - it has widely been assumed the metal is readily available for consumption, should demand domestically or globally pick up significantly.
Indeed, it is a concern that such bonded stocks, estimated by Reuters at some 800,000-900,000 tons - dwarfing the 543,000 tons held at the end of December in the warehouse systems of the world's foremost copper trading exchanges, the London Metal Exchange (320,500 tons), the COMEX (64,150 tons) and the Shanghai Futures Exchange (158,200 tons of duty-paid metal) - could flood the market that has acted as a break on copper price rises this last year.
Meanwhile, China's own production of copper is likely to re-accelerate from this year's 8 percent growth rate, thanks to better raw materials supply.
Imports of concentrates were reported up 18 percent in the first 11 months of 2012, hitting consecutive records of 716,000 tons and 832,000 tons (bulk weight) in October and November, respectively.
Yet copper users' own inventories have run down to relatively low levels, maybe on the back of rising Shanghai inventory being seen as a readily available pool to dip into.
Reuters' point is this could be misguided.
Much of this metal has been brought into China in spite of domestic prices not being at a premium to global prices, i.e. in spite of there being no LME-SHFE arbitrage. It has disappeared into murky ownership and held, it is believed, largely as collateral for a secondary market financing play.
If that is the case, the metal could be tied up in less liquid arrangements than the market believes and not be as readily available for consumption as expected.
If Chinese domestic demand picks up as PMI numbers are suggesting, Chinese domestic consumers could be caught short on metal availability in the first half. That could have a significant impact on global copper demand that at the moment is not factored into prices.