The recovery in copper prices from six-year lows has been driven by stocks of refined metal flowing into China as well as a string of mine closures that promise to tighten the market over the next couple of years.
Copper plummeted to its lowest level since the financial crisis in August, falling below $5,000 a tonne on concerns about slowing growth in China, the world’s biggest consumer of the metal. The red metal is seen by many as a barometer of global growth prospects.
But the price jumped by more than 5 per cent last week, after Glencore added to a series of recent mine closures by some of the world’s biggest copper producers, announcing it would cut 400,000 tonnes of production from two of its operations in Africa.
The recovery has also been helped by the re-emergence of an import window that makes it profitable to ship refined copper into China once again. This is leading to copper cathode being pulled out of storage in China’s bonded warehouse zones and drawn into the domestic market.
While demand has been weak in 2015, China still needs to import 3m tonnes of copper a year to meet its domestic requirements. But for most of this year it has not been profitable to move copper cathode from bonded warehouses into the mainland due to a narrowing between domestic and offshore interest rates. “The material was effectively becoming stuck at China’s border,” said Vivienne Lloyd, analyst at Macquarie.
However, two things have changed in recent months. First, premiums in China — the charge consumers are prepared to pay for immediate delivery of metal on top of market prices — have risen as consumers were forced to draw down on domestic stocks. CRU, a consultancy, estimates premiums in China are currently around $110-$120 a tonne.
Second, China devalued its currency, a move that spooked commodity markets across the globe, creating an arbitrage between LME copper and metal traded on the Shanghai Futures Exchange (SHFE).
“While the arbitrage for physically moving material between the SHFE and the LME markets has now turned negative . . . importers are still keen to buy as they can now benefit from the difference between onshore renminbi rates and offshore renminbi because of the devaluation,” said Matthew Wonnacott, analyst at CRU.
The reopening of the import trade has reduced Chinese bonded warehouses’ stocks, and also the volume of metal waiting to be loaded out of LME storage sites.
CRU estimates bonded stocks stood at 390,000 tonnes at the end of last week, down from 700,000 tonnes in June. Meanwhile, on Monday, LME warrants — the legal title to specific lots of metal — showed more than 16,400 tonnes of metal were cancelled, according to ICBC Standard Bank.
“It is likely this metal is headed for China,” said Leon Westgate, analyst at ICBC.
However, the reopening of the import window should not be confused with a pick-up in underlying demand in China, said Ms Lloyd.
“Demand is looking a little more cheerful, but remains beset by headwinds,” she said. “Improvements we begin to hear of, from power grid demand in particular, need to be maintained, while more lossmaking production should also come offline in order for us to find stability in the recent price rally.”
On Tuesday morning, copper for delivery in three months on the LME was down $19 at $5,274 a tonne — more than $100 off last week’s high.
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