Commodities | Mar 15 2011
– Barclays remains bullish on copper
– Copper demand concerns from Chinese monetary policy tightening overdone
– Seasonal patterns favour a strong 2Q for Chinese refined copper imports
By Chris Shaw
Chinese copper imports fell in February and Barclays Capital notes this has increased market concerns the current phase of monetary tightening will limit consumption of the metal in the world's most important copper consuming economy.
Barclays takes the view such a bearish approach to copper is a mistake. While current monetary policy poses some headwinds to consumption, China was already likely to experience a showdown in metals demand growth in 2011.
Even allowing for this slowdown, Barclays expects China's copper import requirements will remain substantial. As well, while physical market indicators are not showing any signs of improvement, there is scope in the view of Barclays for Chinese imports to continue to increase.
As Barclays points out, China has been securing increasing volumes of raw materials on a contractual basis rather than pay spot prices. This has made Chinese imports less sensitive to price movements and swings in price spreads.
Chinese copper semis output has a clear seasonal pattern and Barclays notes this in turn drives a seasonal pattern in refined copper demand and imports. The trend calls for a steep drop in activity in January and February, followed by a sharp recovery in the March to June period.
Barclays expects this trend will continue in 2011, even allowing for the potential for an increase in bonded warehouse stocks to limit any pick-up in imports. Reports suggest bonded warehouse stocks have increased to as much as 700,000 tonnes, a level Barclays sees as overstated as this would imply Chinese copper demand has contracted by more than 10%.
According to Barclays, any increase in bonded warehouse stocks most likely reflects a change in where supply inventory is being held. Such an increase implies inventory is now being held at ports rather than by the customer.
For 2011 in total Barclays is forecasting only a small increase in total Chinese refined copper imports, but seasonality suggests there will still be a strong pick up in imports in the second quarter.
Additional macroeconomic headwinds suggest increased volatility in copper prices in coming months. But with fundamentals for copper specifically set to improve significantly in coming months, Barclays continues to recommend a long position in copper. Any price dips for the metal should be viewed as a buying opportunity, say the analysts.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
