The largest accumulation of copper in four years has amassed in Chinese warehouses, driven by a combination of soaring prices and lackluster consumer demand, prompting manufacturers in Asia’s largest economy to reduce purchases of the critical industrial metal.
Copper inventories in Shanghai Futures Exchange warehouses have surged to approximately 330,000 tonnes this month, marking the highest level since 2020. The last comparable stockpile was recorded in 2015.
Zhang Jiefu, senior analyst at Zhengxin Futures, attributed the surplus to weak consumption, noting that wire and cable manufacturers are under significant pressure due to a slump in China’s real estate sector. Copper is extensively used in electrical wiring, plumbing, and household appliances, which are essential in building construction.
This build-up underscores the fragile condition of China’s industrial sector, which cut back on copper demand following a speculative trading frenzy in the US that pushed prices to a record high of over $11,000 per tonne last month.
Warehouse stock levels, monitored by traders and analysts, serve as key indicators of market strength, rising when the market is oversupplied and depleting when demand is robust.
David Wilson, commodities strategist at BNP Paribas, explained that Chinese copper manufacturers are incentivized to draw down their own stockpiles and delay market purchases due to moderate demand and elevated global prices.
The increase in copper inventories is reflective of China’s real estate slowdown, weak manufacturing, and sluggish credit activity, as Beijing refrains from directly stimulating household consumption.
Since reaching a peak, copper prices have dropped 13% to $9,600 per tonne, influenced by weak Chinese demand. Typically, copper inventories build up in the early months of the year and decrease in the spring as factories ramp up production post-Chinese Lunar New Year. However, this year’s inventory rise has persisted longer than usual.
Globally, traders warn that copper inventories remain perilously low, covering only a few days of consumption, which could lead to volatile price spikes.
In China, the soft market has caused copper for delivery to Shanghai to trade at a discount to the global benchmark price, an unusual occurrence. Recently, Chinese copper fabricators have resumed purchases, with inventory levels showing slight declines over the past two weeks.
Despite this, the copper stockpile increase highlights the sector’s challenges due to a global oversupply of smelters. Countries like Indonesia, India, and the Democratic Republic of Congo are poised to add significant smelting capacity soon.
“This is the largest addition of new smelter capacity we’ve ever seen in a 12 to 24-month period,” said Wilson.
At the end of last year, the closure of a major mine in Panama and production cuts by leading mining companies led analysts to anticipate metal shortages. Fund managers, betting on rising prices earlier this year, saw physical shortages fail to materialize as the DRC increased mine output and China processed more scrap.
Qin Jingjing, chief non-ferrous metals analyst at SDIC Securities, noted that the excess copper in China also resulted from smelters maintaining output despite considering production cuts in March.
With prices recently falling, JPMorgan analysts questioned whether the more than 10% price decline is enough to shift sentiment in China. Some analysts foresee a potential price rally in the latter half of the year due to pent-up demand. “With the decline in price, we’re going to see people take advantage of this,” said Boris Mikanikrezai, analyst at Fastmarkets.
However, Daniel Smith, head of research at AMT, warned that prices could drop further if funds betting on copper turn bearish and start shorting. “China has hit a soft patch,” he said. “If the funds go short, we could see prices fall back to $9,000 per tonne.”
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