Column: China’s loss of import appetite damps copper’s bull fires

Producers need to invest at least $105 billion to build 6.5 million tonnes of new mine capacity by 2032, according to Simon Morris, Head of Base Metals at research house CRU.

Right now, many producers are struggling even to maintain output. Chile, the world’s largest producing nation, saw output fall by 5.3% last year, according to state researcher Cochilco.

Throw in chronically low London Metal Exchange (LME) stocks and it’s no surprise that bulls such as Goldman Sachs are calling for higher prices. The bank has a 12-month price target of $11,000 per tonne.

Yet the copper price itself seems distinctly unimpressed, LME three-month metal last trading at $8,900 per tonne, was still stuck in a sideways holding pattern.

The lack of bull price impetus is down to China, which sharply reduced its imports during the first quarter of the year.

Import slump

China imported 408,174 tonnes of copper in March, down by 19% year-on-year and the lowest monthly intake since October.

First-quarter imports of 1.3 million tonnes were 13% off last year’s pace.

The preliminary customs report aggregates arrivals of refined metal, anode, alloy and semi-manufactured products.

China’s net imports of copper in refined form may have been even weaker than the headline figure suggests if the burst of export activity in the first two months of the year carried into March.

The world’s largest user exported almost 55,000 tonnes of refined copper over January and February, compared with 20,500 tonnes in the same period of 2022.

As a result net imports of refined metal fell by 13% to 490,000 tonnes over the first two months of the year, the lowest early-year outcome since 2017, and March’s preliminary report suggests they dropped again last month.

China reopening trade

China’s lack of copper import demand has disappointed a market that had high expectations of the country’s reopening after last year’s Covid curbs.

While the Chinese economy grew faster than expected in the first quarter, it has been an uneven recovery with factory output noticeably lagging services activity.

It is “clearly not the right kind of growth from an industrial metals markets perspective,” to quote Carsten Menke, Head Next Generation Research at Julius Baer.

The demand impact is amplified in the copper market because China seems to have already executed its own reopening trade without anyone noticing.

Net refined metal imports rose by 9% last year to 3.64 million tonnes, the second-highest annual tally after 2020, which broke all historical records.

The country also imported 1.8 million tonnes of recyclable materials, the largest amount since 2018, and a record 25.3 million tonnes of mined concentrates.

That’s allowed domestic smelters aggressively to ramp up production, reducing the need for imported units. National refined copper output rose by 11% year-on-year in January-February, according to the country’s official statistics body.

State research house Antaike estimates it accelerated again in March with output up 14% at the 22 smelters surveyed.

Stocks redistribution

Last year’s strong refined metal imports, weighted towards the second half, have led to a rebuild in depleted Chinese copper inventory.

Shanghai Futures Exchange (ShFE) stocks slid from 168,000 tonnes at the start of March 2022 to an August low of 30,500.

Tightness in the mainland market sucked in inventory being stored in Shanghai’s bonded warehouse zones.

Bonded stocks registered with the ShFE’s international arm, the International Energy Exchange (INE), slumped from 89,000 tonnes at the end of September to 16,000 tonnes at the close of December.

Unregistered bonded stocks fell to a multi-year low of 20,000 tonnes in November, according to local data supplier Shanghai Metal Market.

They have since rebuilt to 143,000 tonnes. INE inventory is back up at 82,000 tonnes and ShFE stocks currently stand at 149,000 tonnes having peaked at 252,000 tonnes over the Lunar New Year holidays.

China has rebuilt its inventory cushion, albeit apparently at the expense of LME inventory, which has dwindled to just 51,175 tonnes, the lowest headline level since 2005.

Hidden stocks

The copper market is in danger of a “stock-out” if China regains its import appetite, according to Goldman Sachs, which warns that global visible inventory could deplete by the end of this year. (“Spotting value in a slowdown”, April 12, 2023)

That assumes, of course, that visible stocks are an accurate reflection of broader inventory levels. It’s quite possible that there is more metal being held in off-market storage awaiting the right price signal to appear.

Indeed, some stocks are always hidden from the market, such as the metal that is constantly in transit from mine to smelter to end-user.

Or least they normally are.

There has been an unusual build-up of so-called “transit stocks” in the Democratic Republic of Congo due to a long-running dispute between the government and China’s CMOC Group, which operates the Tenke Fungurume copper-cobalt mine.

CMOC has been banned from exporting since August last year but has continued mining operations. Tenke Fungurume produced 209,100 tonnes of electrowon refined copper in 2021, implying a major accumulation of market-ready metal over the last eight months.

A settlement of the financial dispute has just been reached, according to a CMOC regulatory filing as reported by Bloomberg, freeing up this log-jammed copper for export, most likely to China.

If flows resume, China’s copper imports will pick up from their current low levels but without any direct impact on visible stocks registered with either the LME or its US peer the CME.

That assumes, of course, that China needs any of CMOC’s backed-up production. So far this year it seems to have lost its appetite for more refined copper.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by Sharon Singleton)