The issue of China and the level of copper inventories held in the country remains an ongoing question. While many of our clients will have read the recent articles in the press, we are not too surprised about the level of inventories reported in these articles. CRU track Chinese copper inventories closely in association with our China office.
The recent articles in the press suggest that these latest reported stock figures are far more accurate than any presented in the past, which is probably true. However, we still take any reported figures from China with a pinch of salt as we know from experience that data from China can be incorrect, due to double counting, misallocation etc, including that from the CNIA.
Our own analysis and data suggests that as China’s refined and semis production capacity has grown to feed its consumption requirement, working inventories at both the producers and the consumers have also increased alongside. In addition, any merchants selling material into China will also have increased their working stocks at warehouses (bonded, i.e. VAT not yet paid). So the figures reported in press of close to 2Mt are not a surprise to CRU.
As part of our ongoing analysis of the copper market, we noted a sharp rise in stocks held by speculators in 2009 and 2010 in China. Tighter monetary controls were introduced in April 2011 by the government which led to a change in Chinese import regulations. This restricted the use of copper as collateral for credit purposes and we understand that these speculative inventories have been largely drawn down through 2011.
Looking back over the past few years, CRU estimates that total stocks (incl. SHFE, SRB, producer consumer, bonded warehouse and those held by speculative players) rose to around 1.9Mt at the end of 2009, up from 1.1Mt in 2008. This build in inventory was supported by a hefty 128% increase in net imports of refined cathode year-on-year. Inventories rose further in 2010 to 2.2Mt.
As outlined above, we understand that some inventory has been drawn down by speculators but also at the producers and our current estimates for 2011 suggest that total inventories in China will fall back to 1.9-2.0Mt by the end of this year. Our view is that these stocks are reasonable given the size of the copper market in China. It should also be noted that the SRB holds around half of this metal (based on CRU estimates), so only around 1Mt is actually available to the market.
Overall we see a tight market for the global copper market in the year ahead as production fails to keep up with our outlook for demand. China is 40% of global copper demand. So if it continues to grow, as looks likely, even if at a slower rate, this will be a big positive for global demand.
Our assumptions suggest that even with the level of inventories in place, China will still have to import material to feed its demand requirements. In 2012, the implicit deficit between refined consumption and output should see minimum refined imports of 100,000-150,000tpm to ensure that there are sufficient working inventories throughout the supply chain.
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