- Demand for copper in China’s household appliance and electronics sectors remains extremely strong, according to findings from our trip to the Pearl River Delta last week. Fabricators we met are running at 100% utilization rates and product inventories are reported to be low.
- This does not necessarily translate into bullish price implications, given the current oversupply in the domestic copper market. However, strong demand does imply that the current over-supply could be relatively short-lived.
Companies we visited noted that demand for their products started picking up significantly since H2 09 and remained robust in early 2010. Domestic demand has continued to hold up well in Q1 10, whereas export demand has rebounded more significantly, with some companies reporting increases in the order of over 70% on a y/y basis. This partly reflects a low base of comparison – export demand collapsed last year – and partly points to a gradually recovering external environment. In particular, demand for air conditioners was counter-seasonally strong over Q3 09, and orders are seen as remaining very strong for April and May.”Most fabricators we met have been running at 100% utilization rates for most of this year (barring the Chinese New Year period in February) and are maintaining these full operating rates at present. Despite this, their product inventories are generally reported to be very low, a further testament to the very strong end-use consumption. This has translated into demand for raw materials including copper cathode and scrap. Contract volumes for imported copper cathodes have increased this year, and it was noted that in those contracts with flexibility to adjust off-take volumes, such volumes have been increased to their maximum limits to meet the extremely strong demand.”
This is in stark contrast to the high and rising inventories in public domestic warehouses. Copper inventories held at the Shanghai Futures Exchange [SHFE] have increased by almost 100% so far this year, or by around 90Kt to almost 200Kt currently. Meanwhile, anecdotal evidence also suggests that inventories at bonded warehouses have also been increasing together with high imports and weak domestic physical markets.
First, high warehouse stocks do suggest a domestic oversupply of material at present, which is also being reflected in the physical discounts. That said, domestic consumption has also increased significantly, bringing with it the need for a higher level of working inventories just to ensure the smooth operations in the supply chain. To put this into perspective, we estimate that China’s demand of refined copper reached 6.7Mt in 2009. Assuming a total inventory of around 500Kt in the SHFE and bonded warehouses, this is still not even one month of consumption.”
Second, we believe the high warehouse inventories and low consumer inventories reflect a shift from less visible to visible inventories. This is an intuitive explanation, since the knowledge of a high level of warehouse stocks will provide assurance for consumers to reduce their own inventories and cut capital costs. This implies that the headline increases in warehouse stocks may have exaggerated the actual increases in total inventories.
And the best part is that this hypothesis is not really contingent on internal developed market demand - which could potentially add further upside as the US and Europe recover (assuming the EU can get a grip on their issues).
Author's Disclosure: FCX, SCCO, VALE