A rise in Chinese copper stocks to record levels has divided opinion, with analysts and traders at loggerheads over the reason for the increase.
Copper prices, which fell to a six-year low in January, have risen 12 per cent this quarter and briefly traded above $5,000 a tonne helped by a weaker US dollar and optimism over China’s property market.
But investors are trying to work out why there is 400,000 tonnes of copper worth more than $2bn sitting in warehouses monitored by the Shanghai Futures Exchange.
Analysts at some of the most influential banks in the commodity markets, such as Bank of America Merrill Lynch, say the stocks are a sign that demand in China, the world’s largest consumer of copper, remains weak.
Copper is seen as a key barometer for the health of China’s economy, due to its use in wiring, cables and construction.It is also key for the fortunes of some of the world’s largest global miners.
But many traders say the reason behind the build-up in stocks is more complicated and does not reflect weak demand. They note that most of the metal has not been warranted with the Shanghai exchange, meaning the metal is not backed by an official receipt.
They suggest the build-up has been driven by Chinese smelters, who have written derivative contracts as a way of generating cash amid weak copper prices. That has left them potentially exposed as the price has rebounded.
That could have encouraged them to deliver metal on to the exchange, to give the impression of weak demand and large stockpiles in the country and push the price back down.
Imports of copper concentrate — partly purified ore that is later smelted to produce refined metal — to China were also strong at the end of last year, which has left smelters with stocks of copper cathodes.
In the rest of the world, inventory trends are running in the opposite direction.
Copper stocks on the London Metal Exchange have dropped 38 per cent this year. On Tuesday, copper for three-month delivery on the London Metal Exchange was trading at $4,870 a tonne.
Some of that metal has made its way to China. Customs data show refined copper imports jumped sharply in the first two months of 2016, compared to the same period a year ago.
That flow of metal was driven by a difference in prices between Chinese domestic prices and the rest of the world — a window that has now closed.
“Metal arriving at port in China is now being deposited in bonded warehouses rather than brought onshore give the current unattractive import economics,” said Standard Chartered.
Stocks at bonded warehouses have risen to around 500,000 tonnes, taking total visible Chinese copper stocks close to 900,000 tonne — the highest since May 2014. That is causing concern among speculators who have turned increasing positive on copper.
Total long positions in copper — bets that the price will go up — are at levels not seen since July 2014, according to London-based broker Marex Spectron.