China base metal buys will hardly dent ample supply

　　China's plan to buy base metals for state reserves in an effort to cushion domestic smelters from slowing economic growth would support prices but would not significantly reduce bulging stockpiles, traders and analysts said on Wednesday.

　　China is the world's biggest consumer of base metals, but demand has faded this year as exports have weakened, pushing stocks of copper and aluminium to near-record highs and driving some smelters into loss-making territory.

　　Any buys for state reserves would take up some of the slack in China's supply chain, analysts said, rather than igniting demand, with purchases planned on a much smaller scale than in the wake of the 2008/09 financial crisis.

　　"It's a plea for some help. Obviously the smelters have requested some official assistance and we know stocks have gone up. Ostensibly it is to help the cash flow of the smelters," said analyst Robin Bhar of Societe Generale.

　　"On copper, it is difficult to see the move lifting prices on a sustained basis, but it probably means the downside is restricted. On aluminium, which is a much bigger market, it is neither here nor there."

　　Sources told Reuters this week that China's influential state planner could revive a stockpiling plan as soon as this month to buy around 400,000 tonnes of primary aluminium ingots and 165,000 tonnes of refined copper cathode for state reserves.

　　This volume equates to around 8 days of consumption for refined copper and nearly 7 days for primary aluminium, and compares to China's current stocks of more than one million tonnes of both copper cathode and aluminium ingots.

　　INVENTORIES NEARLY DOUBLE END-2011 LEVEL

　　The stocks include metal held by Shanghai Futures Exchange warehouses, bonded warehouses, producers and end-users.

　　"Inventories hanging over the market are mainly bonded warehouses, estimated around 750,000 tonnes, compared with about 300,000 back in end-2011," Macquarie analyst Bonnie Liu said in a note this week, adding that fourth-quarter copper orders had been almost flat with the third quarter.

　　About 800,000 to 900,000 tonnes of refined copper cathode was stocked in bonded warehouses in Shanghai and the southern province of Guangdong, traders estimated last week.

　　The state purchase looks tiny against the market's annual consumption of more than 21 million tonnes of primary aluminium, analysts said.

　　"I don't think the purchase of aluminium would have a big impact," said a source at a large aluminium producer who did not want to be identified in the absence of authority to speak to the media.

　　"Domestic prices may rise one or two days only. The market now is over-supplied and demand is far behind supply growth."

　　Markets are hoping Beijing's new top rulers will announce stimulus measures following the once-in-a-decade leadership change set to be ushered in by a Communist Party congress beginning on Thursday.

　　Although China racked up annual GDP growth of 7.4 percent in the third quarter of 2012, this was its slowest pace since the depths of the financial crisis in the first quarter of 2009.

　　The extra demand from the state purchases might lead investors and end-users to conclude prices had bottomed and the time for restocking was near, some analysts in China warned.

　　"A purchase by the State Reserves Bureau would have psychological impact," said Jing Chuan, chief researcher at Citic Futures, referring to high domestic prices of copper and aluminium, which resulted in record imports in 2009.

　　"We saw that in 2008/09, when the SRB buying pushed up prices strongly, although it did not change the real supply and demand situations."

　　A sales manager at a Chinese copper smelter said the purchases could signal the domestic market that prices had bottomed, encouraging speculators and end-users to build stocks.

　　Unlike the launch of the inaugural stockpiling in 2008, the SRB has not officially announced current purchase plans.

　　In December 2008 it said it planned to buy 1 million tonnes of aluminium, 400,000 tonnes of copper and a total of 400,000 of lead and zinc from domestic smelters over three years.

　　But it had only bought 235,000 tonnes of copper, 590,000 tonnes of primary aluminium and 159,000 tonnes of refined zinc by the end of that round.