China's Copper Bloat May Squash the Best Rally in Two Years

  • China's copper demand to grow at slowest pace in decade: CRU
  • Barclays says prices may slide to low $4,000s by year-end

The rally in copper is being met with growing skepticism.

Analysts including CRU Group to Barclays Plc are predicting losses, and money managers have pulled back bullish wagers. Demand from China, the world’s biggest buyer of the metal, is increasing at the slowest pace in a decade and there’s not enough appetite to absorb a surplus that accumulated over the past few months, according to CRU, a London-based metals researcher.

The pessimism is coming after copper climbed 4.1 percent since December to $4,899.50 a metric ton in London, putting the metal on track for the only quarterly advance since mid-2014. While prices rebounded on signs that miners are cutting back production, the other side of the equation -- consumption -- hasn’t show much improvement.

“China is well-stocked for copper and we don’t feel the real end-use demand is running high enough to absorb all of that material,” Vanessa Davidson, CRU’s copper research director, said in an interview from London. “We should expect another leg lower.”

Inventories tracked by the Shanghai exchange are near the highest ever, boosted by expectations of a weakening yuan, which led traders to put cash into dollar-denominated assets. Arbitrage opportunities have also caused metal to flow from LME-tracked warehouses to Chinese storage.

Investors are also growing more wary as a recovery for the dollar hurt demand for commodities as alternative assets. Money managers reduced net-long holdings in copper by 4.4 percent to 23,011 U.S. futures and options in the week ended March 22, according to Commodity Futures Trading Commission data released three days later.

Copper could drop to the low $4,000s a metric ton, from $4,945 in London last week, according to a Barclays report dated March 28. The bank said commodities are at risk of steep declines as investors rush for the exits.

China’s copper consumption will increase 0.6 percent this year, the slowest rate since 2006, as demand from the housing industry declines, according to CRU, which is organizing a copper conference in Santiago next week. That compares with 3.8 percent in 2015.

While supply cutbacks will cause a small deficit in the copper market for 2016, the market is expected to see surpluses for the following two years, according to CRU. Prices are estimated to average about $4,700 a ton this year and $4,500 next year.

"People are waiting for real signs of Chinese demand taking off,” said Davidson. “They’re going to be disappointed."

Before it's here, it's on the Bloomberg Terminal.