Copper Inventory May Be High, but Demand Is Higher
Copper bulls waiting for a magic bullet from China to shore up the metal’s price have been left disappointed. Recent data from China - specifically industrial production and imports data - continue to point to sluggish demand in a market dogged by high inventories.
But analysts say the high stockpiles - about one to two million metric tons of copper are estimated to be sitting in China’s warehouses - pale in comparison to China’s continued appetite for the metal widely used in the production of electrical wires, roofing and plumbing and industrial machinery.
“That has to be put in context that over the next 5 years, China will probably consume 50 million tons of copper,” Andrew Keen, Head of Metals and Mining Equity Research for Europe, the Middle East and Africa with HSBC, told CNBC Asia’s “Squawk Box” on Monday.
“So there is a major strategic shortfall in the copper market from a Chinese perspective and those warehouses are really part of that longer-term solution…We don’t think it’s a big problem for the copper market going forward.”
China consumes about 45 to 50 percent of global copper demand and makes up only 8 percent of supply, Keen added, meaning that the market for the copper is “structurally” tight.
Copper prices have sunk about 12 percent since the end of April as persistent worries over Europe’s debt crisis and China’s economic outlook prompted a sell-off in risk assets such as commodities. China copper imports gained 5.9 percent in July from the previous month but it’s still at a 10-month low, according to official data last week. A rise in inventories in China is also stoking worries that demand the metal will weaken further.
Even so, Daniel Morgan, Global Commodities Analyst with UBS in Sydney, went as far as to say that inventory in China is “pretty low.”
“Copper looks interesting, in the short term at least to us,” Morgan told CNBC on Monday. “There’s been supply tightness for quite a few years and we see it trading at $3.40 a pound (in New York) right now. We have been looking at China’s import flows and they’re actually pretty strong and their inventory position is pretty low at this point.”
Keen also noted that inventory at exchanges such as London Metal Exchange (LME) actually fell 20 percent in the second quarter to 444,000 metric tons, despite prices falling 9 percent.
“This lack of inventory growth is the hardest indicator that there has neither been a significant negative shock to demand nor a pronounced destocking cycle,” Keen said in a report published last week.
Prices will average about $8,000 per ton on the LME this year this year, $7,500 in 2013 and $8,000 in 2014, he said. It was trading at $7,486 on Friday.
Some economists caution against over-bullish estimates. Donald Straszheim, Senior Managing Director of China Research with ISI Group, an investment advisory firm in Boston, said while China’s economic slowdown has been managed “very well”, it is a new economic environment that investors have to get used to. The boom days are almost certainly over, he said.
“I think China’s growth rate is slowing and slowing a lot. And the old era of 10 percent growth is going to become the new era of 6 percent growth,” he told CNBC on Monday. “So the world is going to begin to absorb the idea that there’s going to be weaker demand for a lot of these commodities for a long time to come.”
- By CNBC's Jean Chua.