While Dr Copper Waits for China, China Buys More Copper

Summary:

Doctor Copper has started the new year with a fresh spring in his step as investors bet on a powerful demand boost from China's post-COVID reopening.

London Metal Exchange (LME) three-month metal is currently trading at $9,345, up 12% on the start of January, with funds jumping back into copper as a proxy for the China recovery story.

Yet it's not as if China, the world's largest copper user, has been absent from the market.

The country's net imports of refined copper totalled 3.64 million tonnes last year, an increase of almost 300,000 tonnes on 2021 and the second highest tally after the record-breaking year of 2020.

Imports of mined concentrates, meanwhile, notched up a new annual record of 25.32 million tonnes and those of copper scrap were the highest since 2018.

The mystery is where all this metal has gone since visible inventories within China remain historically low.

Booming Imports

The strength of last year's imports was even more surprising given the financial problems at privately-owned Maike Group.

One of China's top import channels abruptly halted all its copper purchases in the summer of 2022 after it ran out of cash to pay suppliers.

This has created a ripple effect of supply shortages and higher premiums for users in the Shanghai area and Guangdong province, where Maike was a particularly powerful player.

But it has clearly had minimal impact on the overall flow of refined copper into China.

Nor has there been any surge in arrivals of unwanted Russian metal such as seen in aluminium. China's imports of primary aluminium leapt by 59% last year as metal was redirected from Western markets. But China's imports of Russian copper actually fell by 20% to 324,000 tonnes in 2022.

Last year's refined metal import boom was mirrored in the raw materials markets, with record inflows of copper concentrate and a 5% increase in imports of recyclable copper.

Tighter purity thresholds introduced in 2021 mean that last year's 1.77 million tonnes of scrap imports contained a lot more copper than the historical norm.

While shipments from Europe and the United States have bounced back from the low levels of 2020, when the Chinese government was threatening an outright ban on scrap imports, those from Hong Kong have collapsed. The authorities appear to have closed what was for many years a back door for lower-grade material.

With more copper flowing across all channels into China, the country should be awash with the stuff.

Yet it doesn't seem to be.

Low Stocks

China's visible copper inventories are currently trending sharply higher as they always do over the Lunar New Year holiday season.

The Yangshan premium, a closely-watched indicator of China's spot import appetite, has plunged to a nine-month low.

But this year's stocks rebuild is taking place from very low levels.

Inventory in Shanghai's bonded warehouse zone has risen from 20,400 tonnes in November to 82,000 tonnes, according to Shanghai Metals Market. This time last year bonded inventory was over 200,000 tonnes and in 2021 it was higher still at 350,000 tonnes.

Copper stocks registered with the Shanghai Futures Exchange jumped by 70,700 tonnes to 140,000 tonnes in the first three weeks of January before the holiday period.

Even allowing for more rebuild in the next few weeks, the seasonal surge is muted relative to previous years. The post-holiday peak was 168,000 tonnes last year, 200,000 tonnes in 2021 and 380,000 tonnes in 2020.

Hidden demand?

One possible explanation for all the missing copper is that China's demand held up much better than expected during a year of rolling lockdowns.

While purchasing managers indices (PMI) are still indicating contracting manufacturing activity, they are not nearly as weak as they were during the original 2020 COVID-lockdown period. The official PMI fell to 47.0 in December but it was as low as 35.7 in February 2020.

Moreover, it's possible that China's government-led drive towards renewable power infrastructure is generating a copper-specific stimulus in the form of more power lines, solar panels, wind farms and electric vehicles.

Goldman Sachs expects so-called "green demand" to account for 68% of total demand growth in China this year, offsetting continued weakness in the property sector. ("Copper: The end of surplus", Dec. 6, 2022)

The investment skew towards decarbonisation may have altered copper's traditional relationship with broader indicators of manufacturing activity.

Restock?

There is also the strong possibility that China has been restocking into a low price environment.

The record imports of 2020 took place in a year when LME copper crashed and burned to below $5,000 per tonne, creating a not-to-be-missed bargain-buying opportunity.

Copper was trading above $10,000 per tonne in the first four months of 2022 before sliding to a July low of $6,955, an equally tempting prospect for price-sensitive Chinese buyers.

China's net imports of refined copper were running below year-earlier levels through May but steadily accelerated over the second part of the year.

One intriguing possibility is that China's national stockpile managers have also been restocking.

There has been persistent speculation the State Reserve Bureau (SRB) has been importing copper. The Bureau doesn't give much away, but it's worth remembering that it sold at least 110,000 tonnes of state copper as recently as 2021 when the price surged to above $10,000 per tonne.

The lower prices over the second half of 2022 would have been a tempting opportunity to replenish its secretive stockpiles.

If state reserve managers agree with Goldman Sachs' prognosis that copper is heading for a structural supply deficit with resulting higher prices, they might have been tempted to buy even more.

Goldman suggests that a sign of restocking by China's copper sector would be net refined imports being consistently higher than 280,000 tonnes per month.

Actual net imports averaged 284,000 tonnes per month in the first half of the year and 322,000 tonnes per month over the second half of 2022.

While the copper market awaits the great Chinese copper restock, it may already have started.

Source: Reuters

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