Signs Of Trade-War Copper Stockpiling In China

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Tim Treadgold

Someone is stockpiling an awful lot of copper with the State-Owned Enterprises of the Chinese Government the most likely suspects, and the trade war with the U.S. the most likely cause.

What’s happened, and there isn’t yet a clear-cut explanation, is that copper held in the warehouses of the major metal-trading markets in the U.S., Britain and China has been disappearing much faster than it could be consumed.

A tell-tale indication of unusual copper-market activity is that since the end of March, as the price of copper has been falling by around 10% the combined stockpiles of the London Metal Exchange, the Shanghai Futures Exchange and the U.S. Comex market have dropped by 47%.

Falling Stocks Should Trigger A Price Rise

Normally, a big fall in stockpiles on metal exchanges is matched by a rise in the price of the commodity.

Why that hasn’t happened with copper has seasoned observers wondering whether there is a big speculative play underway, which has happened before in copper.

Or whether the metal is simply being shifted out of sight into private warehouses.

Rolls of coiled copper in a warehouse. Photographer: Munshi Ahmed/Bloomberg

The fact that stockpile are depleting, without a corresponding rise in the price of copper, indicates that some sort of government-sponsored activity is underway because while copper is a widely-used metal in construction, electrical grids and appliances, and vehicles, it is also a strategic metal with multiple military uses.

Other important metals, including nickel and aluminium, have also seen a steady decline in stockpiles since the U.S. v China trade war started earlier this year, but like copper there has not been a significant price reaction.

Macquarie Bank was the first to note the fall in metal exchange stocks without a price reaction, but it concluded that the metal had not been consumed, it had simply been shifted out of sight.

Copper On A Roller Coaster

“Copper stocks in exchange warehouses have been on a roller coaster ride this year,” Macquarie said in a research note.

“Stocks started the year at 550,000 tons, peaked at just over 900,000 tons at the end of March and have since been falling, reaching 462,000 tons last Friday.

“It’s the Shanghai Futures Exchange stocks in China that have led the decline, with the level now nearing one-third of their peak in March.”

In its attempt to work out where the copper had gone Macquarie examined Chinese Government data and metal exchange numbers to conclude that apparent copper consumption rose by 12.3% in the seven months to the end of July, an unlikely result.

That led to a question as to whether it was reasonable to suppose that China’s copper consumption grew by more than 12% year-on-year in the first seven months of 2018, and that consumption had absorbed all imported material and absorbed futures exchange stocks?

Newly made copper cathode sheets. Photographer, Andrey Rudakov/Bloomberg

“The lackluster Chinese economy suggested that is preposterous,” Macquarie said.

After examining weak spending on the national electricity grid, flat car production, erratic appliance production, feeble infrastructure but firm construction spending the bank said a copper consumption growth rate of 4% was more likely.

Price Premiums In China And The U.S.

Another test to link changes in the copper market to the trade war was to look at regional premiums charged for metal, an additional charge unique in certain areas with copper in both China and the U.S. attracting a price premium.

“These two nations are of course lining up for a trade war, so there may be some impact on premiums from expected tariffs on metal flows,” the bank said.

“Notably, European premiums are undisturbed.”

Boiled down, copper appears to be in motion, moving from visible metal-exchange controlled warehouses into another warehouse — but precisely who’s loading up with copper is a question yet to be answered.


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