Giant China Copper Hoard Has Miners Grappling With Demand Enigma

  • Copper accummulated by China equals top miner's annual output
  • China holds almost 80% of world's copper, Goldman estimates

China has accumulated most of the world’s copper stocks, with miners and investors trying to figure out what that means for future demand.

China, which consumes more than 40 percent of global copper, now accounts for almost 80 percent of stockpiles after booming imports late last year sucked up stocks held elsewhere, according to Goldman Sachs Group Inc. The bullish view is that hoarders are seeing bargains. Bears say the buildup reflects demand weakness as China transitions to a consumer-driven economy.

Copper lost a quarter of its value last year as slowing demand in the Asian nation exacerbated a glut after years of over-investment by miners. The divergent views on where demand is headed are on show this week at the industry’s annual gathering in Santiago. Some participants have simply stopped trying to read China, as physical consumers are joined by those who use copper as collateral for financial transactions.

“China is an enigma,” Stefan Boel, who sits on the management board of Aurubis AG, Europe’s top smelter, said in an interview from the conference. “Everyone has an opinion and the opinion goes all across the spectrum. Find me somebody who knows exactly what’s happening.”

Reserves in China are estimated by Goldman Sachs at 1.8 million metric tons, including both exchange and non-exchange inventory. That’s about the size of the annual output of Codelco, the world’s biggest copper miner.

Transition Risk

While copper has rebounded from January’s six-year low, it’s more than 50 percent lower than at the height of the commodities boom in February 2011. Demand in China needs a marked pickup in the next few months to support prices, according to Max Layton, an analyst at Goldman Sachs. Any slip-up in China’s transition may send the metal to as low as $1.40 a pound, he said. It’s about $2.14 now.

“You’re in unchartered waters here with China’s macro shift from an investment-led economy to a consumption-driven economy," Layton said in an interview. “And in Chile you are speaking to an audience that’s 100 percent long copper. The risks to most people’s China demand forecasts are probably skewed to the downside.”

While copper held in warehouses monitored by the Shanghai Futures Exchange fell in the past two weeks, it has more than doubled this year to a record high last month. Metal held in China’s bonded warehouses, which isn’t monitored and is custom-free, has expanded to a seven-month high amid oversupply, according data compiled by Bloomberg Intelligence.

China has drawn in metal from elsewhere. Inventories in LME-tracked warehouses have dropped for nine straight weeks to the lowest since August 2014.

A combination of arbitrage and expectations of a weaker yuan have pulled tonnage to China along with the use of the metal as collateral to obtain financing, according to Macquarie Group Ltd. Shipments may have slowed as the arbitrage window closed.

The stockpile is not necessarily a bad thing, and shows the Chinese state is buying and holding copper for strategic reasons, according to Patrick Cussen, chairman of CESCO, one of the organizers of this week’s events in Santiago.

Michael Lion, a consultant at Lion Consulting Asia Ltd., who has been in metals almost five decades, said the inventory buildup shows both a weakness in current physical demand and speculation that it will eventually recover.

Mixes Messages

Adding to the debate are mixed messages generated by economic and industrial data coming out of China that mean people are trading “on anecdotes and hearsay,” Matthew Wonnacott, a senior consultant at CRU, said on Tuesday in Santiago.

“I don’t think anyone knows how much copper is stockpiled in China," Donald Selkin, chief market strategist at National Securities Corp. in New York, who helps manage about $3 billion. “We have to rely on their statistics, which sometimes tend to be off a little bit.”

— With assistance by Joe Deaux

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