Why Is China Hoarding Copper?

By Jonathan Barratt

 

In last week's bulletin we mentioned that stocks in Shanghai continue to grow, in fact Chinese imports for January where up 13.6% when compared to the same period last year. In December, China imported 508,942 tons of the metal which was a record month and up 47.7% from last year. Why is China hoarding the metal? It is hard to believe given the uncertainty in Europe, and the expected softness in the Chinese economy, as to why the order flow remains so robust and in record territory. This news should translate to overall weakening demand for the metal. In quarter four we hear that China added 300,000 tons of the red metal to her already impressive stockpiles.

As can be seen above, Business Confidence in China doesn’t warrant the hoarding. The only two real explanations we feel as to why China is hedging its bets are a projected short fall in supply of the metal early in 2012 and the emergence of confidence associated with a resolution to Greece’s debt concerns. In December we suggested the projected shortage of the metal early in 2012 of up to 350,000 tons would provide some price support, and with China looking to consume close to 35-40% of global annual supply the price is intrinsically important to stability. This potential shortage appears to be “shaking a few cages” and providing concern for Chinese importers, which is echoed by increased imports and it seems a prudent business decision to restock after the draws in late 2011. In addition, we feel that China is hedging its bets on the price as a resolution to Greece’s crisis, combined with continued economic confidence in the US, could emphasize the shortage and thus prices would further rally. As a hedge it makes sense and it will be interesting to monitor the imports over the coming month, however so far the price action is not providing any bullish momentum. Longer term we like it, just like the Chinese, however we remain short a small position after choppy trading last week.

Chart Point

The resistances at US395 just held and our stop on the short position was prematurely triggered early in the trading week. The metal traded to a high of US396.80 before falling back in the range. We reentered the position when the break failed to materialize. At the moment we have a confirmed range of US378 on the downside and US396 to the topside. We can see signs of price momentum divergence on the daily chart, which is aiding our short bias. If we see US378 broken on a daily basis then will add to position and look for the target of US360, which we have had for a while.

 

 

Produced by Jonathan Barratt direct from the trading desks of Commodity Broking Services, Barratt's Bulletin provides expert analysis of commodity markets, global indices and foreign exchange movements. Click here to take a no obligation 21-day trial to Barratt's or to learn more visit www.barrattsbulletin.com. Content included in this article is not by association necessarily the view of FNArena (see our disclaimer).