Copper prices have dropped sharply from $8300/tonne to $7500/tonne. This massive correction in the prices is mainly due to the supply glut in the market. Quite often copper is considered as a good economic indicator but while demand growth has moderated, surge in supply has remained a major concern for the red metal.

A rally in copper prices during the start of the year had more to do with increased risk appetite after the aggressive steps by the US and Japanese central bankers and cyclical upturn in the Chinese economy. But rising home prices in China and wounded state investment vehicles are not likely to lead to any exponential rise in investment demand of copper.

China has reiterated its rhetoric to curb inflation. Since last one-and-a-half year, the Chinese economy has cooled off and global markets have been struggling to find another market like China, which consumes more than 40 per cent of the global copper production. While on the one hand, the demand growth has moderated, on the other, the supply side of the red metal has been the strongest in the last decade.

Declining imports

Imports of refined copper in China have been declining since the start of 2012 and still remain well below record imports that were seen in December 2011. In February 2013, China’s imports of copper refined metal, alloy and products were 2.98 lakh tonnes which is the lowest level in 20 months.

Against this refined copper production in China has been quite strong. In December 2012, China produced 5.8 lakh tonnes which is the highest refined metal output. Also, in the first two months of 2013 refined copper production in China has been 11.90 per cent higher from the 2012 levels.

Copper inventory at the London Metal Exchange (LME) monitored warehouses stood at 5.47 lakh tonnes (as on March 19) which is about 70 per cent higher than the start of 2013. Also, copper inventory at SHFE (Shanghai Futures Exchange) monitored warehouses are 40 per cent higher since the start of 2013.

Apart from the inventories held at SHFE warehouses, inventories held at bonded warehouses in China are believed to have increased manyfold. Copper stocks in China's bonded warehouses hit a record high of over one million tonnes ending 2012 due to weak domestic demand. Traders estimate that still about 9 lakh tonnes of copper is being stored in bonded Chinese warehouses.

Falling Physical Premiums

With rising stockpiles at SHFE-monitored warehouses and reducing imports, we have seen a decline in the spot copper premiums in China. Plentiful bonded stocks and reduced buying have kept premiums low, around $40 to $65 a tonne over the cash LME copper prices.

Apart from China, in Europe too physical copper premiums are seen under pressure. In January, the median copper premium in Europe seem to have fallen to $60 a tonne from $80 a tonne in December 2012.

Premiums are an indicator of the physical activity of the underlying at concerned markets. Hence, falling premiums does signify that the demand situation is bleak.

Financing Deals

Some banks in China have tightened credit for imports of refined copper. As domestic prices in China stay below LME rates, stockpiles rise in bonded warehouses and physical premium squeezes. Hence, local banks are finding it more risky to lend for copper stocks.

Chinese banks suffered a huge setback after falling into similar trades in steel as they failed to recover billions of Yuan in loans. Hence, to avoid similar kind of losses in copper they have tightened some measures for the same.

The US Securities and Exchanges Commission approved two copper ETF’s. Prices have remained weak despite this. Copper prices have cooled off recently and we feel any upside of 2 per cent to 4 per cent can be a good selling opportunity. We do not expect any meaningful recovery in the prices of copper. Copper prices are likely to remain weak, going forward.

(The author is Head — Commodity Research, irmal Bang Commodities Pvt Ltd. The views are personal)

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