Chinese Copper demand will disappoint: Barclays

 

 

Sentiment amongst Chinese fabricators and manufacturers is negative. Orders have been slow to improve following the Chinese New Year and in some sectors are below year-ago levels. Inventories of cathode at consumers are low, but inventories of finished product are higher than usual for the time of year.

 

 

Fabricators and some manufacturers increased production strongly in January-March in expectation of a pick up in demand during the seasonally stronger Q2. But, so far, demand has been softer than they expected. Bonded warehouse stocks of copper have continued to increase. Current copper bonded warehouse stocks is estimated to be around 600Kt, in line with the 2011 peak.

 

 

March and April copper imports could be stronger than the market expects. The metal that had been booked in October/November 2011, when the arb on six-month forward prices was open, will continue to flow into the country. It is also likely that we might see a pick up in exports. Chinese smelters have been delivering metal into bonded warehouses from which traders have been exporting metal onto the LME, attracted by the backwardation.

 

 

Overall, the Chinese demand in the short term is likely to disappoint before beginning on a recovery trajectory later in Q2. Subsequently, imports may weaken until bonded stocks are run down to more normal levels, possibly in Q3 12. With the market already expecting a drop in Chinese imports, it is doubtful that this alone would have a significant negative impact on LME prices.

 

 

That’s more likely to be determined by the market’s evaluation of how long imports will weaken for and whether it's the result of short-term dislocation or longer lasting core weakness. The LME backwardation meanwhile is likely to continue unless Chinese exports are big enough to begin offsetting the draws in LME inventories.