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Chinese stockpiling spurs copper price rally
By Chris Flood
Published FT: March 22 2009
Copper stockpiling by a secretive Chinese state organisation has helped trigger an impressive rally of almost 35 per cent in the price of the metal this year.
Copper’s fortunes are closely tied to the industrial cycle so the price jump, bigger than that of gold, has grabbed attention outside the commodities market, with some questioning whether it could signal a turning point for economic growth.
However, developments in China, which accounted for almost a third of global copper consumption last year, remain central to the market’s prospects.
Industry reports point to buying by the Beijing’s State Reserves Bureau, which manages the country’s strategic stockpiles.
SRB’s decisions are shrouded in secrecy, making it virtually impossible to assess accurately how much the Chinese government has bought. Traders estimate that the SRB is in the process of securing 300,000 tonnes and speculate that it could buy up to 1.2m tonnes this year. Global copper production last year stood at 18m tonnes.
David Wilson, metals analyst at Société Générale, said buying by the SRB has been the main driver behind rising copper prices. “Real demand has played little part in the current copper price rally and remains notably weak as global manufacturing activity continues to decline,” he said, summarising a view widely held in the copper market.
The flow of copper into China has been clear as the stocks held in London Metal Exchange’s warehouses, particularly those in Asia, have fallen while inventories in Shanghai have increased.
Traders believe China is rebuilding its strategic stocks because the current price is less than half last year’s record $8,940 a tonne and also to support its struggling local copper smelters and avoid job losses.
Sentiment towards copper also received a boost from the Federal Reserve’s decision to buy US government debt, a move that is expected to accelerate the economic recovery.
The benchmark LME three-month copper price hit a four-month high of $4,075 a tonne last week, up 44.2 per cent from its four-year low of $2,825 reached last December.
It continued its rally on Monday, jumping 4.6 per cent from Friday’s close to $4,135, and has risen 34.7 per cent since the start of the year.
Michael Jansen, metals analyst at JPMorgan, said copper would struggle to establish a foothold above $4,000 a tonne, a key level at which the majority of producers can operate profitably and also forward sell their future output. He viewed the current rally as a “clear selling opportunity.”
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