Although Chinese copper (COMEX:HGN14) imports in May were 16% below the previous month, year-to-date purchases through the end of April were 33% higher than in the same period last year. Recent events, however, may threaten the longevity of the insatiable buying spree we’ve seen over the past year (Chart 1).
Prices dropped sharply this month (Chart 2) after a scandal was uncovered at China’s Qingdao Port. Record-keeping at off- exchange warehouses in China is notoriously opaque. It seems that cargoes at the port in question were double counted--and beyond--and used to post collateral for financing deals multiple times for single cargoes. At issue is the possibility that banks would curtail financing for imports and, as a result, that the monstrous volumes of monthly copper imports would contract rapidly. This could indeed become a bearish factor.
Other barometers of global supply/demand fundamentals present mixed signals. Warehouse stocks have been falling and are now at multi-year lows. Combined stocks at the London Metals Exchange, Shanghai, and COMEX stand at 270,000 tonnes, compared with 935,000 tonnes one year ago (Chart 3).
Chart 3 (left): Combined warehouse stocks; Chart 4 (right): LME Spot/3-month copper spread.
As stock levels plunged, backwardation on the LME rose to its highest level in two years. Normally, higher spot prices should encourage deliveries and result in higher exchange inventories. However, it was short lived because the backwardation quickly faded as prices came off (Chart 4). Stock levels at bonded warehouses in China are still said to hold 600,000 to 700,000 tonnes, although there is no official data to substantiate the amount. It’s all a bit confusing, but the balance of evidence suggests that we cannot place too much weight on bullish warehouse data.