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Factory data underlies weak Chinese copper market

Keywords: Tags  copper, China, manufacturing, PMI, HSBC, Goldman Sachs, copper imports

SHANGHAI — China’s physical copper market remains weak and robust import figures are obscuring a slowdown in real business activity, market participants told AMM sister publication Metal Bulletin.

Imports of unwrought and fabricated copper surged to a record 536,000 tonnes in January, a year-on-year increase of 53 percent.
But as economic indicators in China point to a slowdown in manufacturing, traders highlighted low demand and an expanding contango on the domestic market.

“There is copper all over the market, but both traders and downstream consumers are reluctant to take the cargoes,” one domestic copper trader told Metal Bulletin.

“The spot copper discount enlarged to above 300 yuan ($49) per tonne but it’s still hard to find buyers,” he said.

The discount in spot prices to the Shanghai Futures Exchange (SHFE) front-month contract would normally imply an immediate surplus and weak immediate demand.

Underlining concerns about an economic slowdown in China, the latest manufacturing purchasing managers’ index (PMI) fell deeper into negative territory. London-based HSBC Holdings Plc’s preliminary PMI for February registered a seven-month low of 48.3, down from 49.5 in January.

Import figures into China have long been dislocated from actual physical demand because of imports undertaken in financing deals.

But this may be particularly the case for January, as a credit squeeze at the start of the year encourages alternative forms of financing.
“Trading is active these days, and copper financing business remains robust,” one copper trader said, “Even though (regulators) have made efforts last year to put more scrutiny on these deals, our business is still expanding.”

Goldman Sachs Group Inc. estimates that inventories of refined copper in China have risen by about 200,000 tonnes since the start of the year, with bonded inventories up to 700,000 tonnes from 550,000 tonnes and SHFE stocks rising to 180,000 tonnes from 125,000 tonnes.

“Over-importing reflects over-ordering under long-term contracts (due to low long-term contract premiums) and increased demand for Chinese Copper Financing Deals (CCFDs) as A-list companies increased imports into bonded warehouses so that they can qualify to do CCFDs in 2014,” New York-based Goldman Sachs said in a report Feb. 14.

Declining London Metal Exchange inventory reflects stocks shifting off market rather than a deficit market, due to financing deals and the impact of the new LME warehousing rules, Goldman Sachs said.

Active copper financing also caused spread tightness, Goldman Sachs said.

“Since we do not expect these deals to end anytime soon, the LME spread tightness is very likely to persist, with risks that spreads tighten further during the seasonally strong period of demand in the second quarter,” a Goldman Sachs analyst said in the report.

The Shanghai copper spot premiums have moved to $170 to $180 per tonne after the Chinese New Year, after staying at $165 to $175 per tonne in January.

A version of this article was first published in AMM sister publication Metal Bulletin.

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