Commodities | Jan 28 2011
By Chris Shaw
Barclays Capital visited China last week to meet with copper semi producers, wire and cable makers and physical traders to get their views on the state of the copper market at present.
Refined copper imports in China have been volatile in recent years, rising by almost 130% in year-on-year terms in 2009 before declining by about 8% in 2010. Barclays suggests the decline last year reflects the high 2009 base, stronger domestic refined copper output and better scrap supply.
The overall conclusion from the meetings, reports Barclays, is sentiment remains very cautious among consumers, as recent price increases appear overdone. This means despite low inventories among copper semis fabricators and wire and cable producers, re-stocking is not a priority at current price levels.
Leading into the Chinese New Year celebrations, market activity is expected to remain weak, Barclays noting while some in the market see consumption picking up after the holidays the magnitude of any improvement remains uncertain.
Some recent imports have not been absorbed by actual consumption as the domestic market has been trading at a physical discount, so Barclays notes inventories in bonded warehouses in China have increased.
This means when actual demand picks up, inventories at these warehouses will be drawn down before consumers look to import more material. The implication is the shift from de-stocking to restocking may have been lengthened by the recent instances of import financing.
The end of 2010 saw the removal of the 50% VAT rebate on scrap and Barclays expects scrap usage is likely to decline a a result. What also supports this is the fact scrap inventories have already been drawn down in recent months.
One final conclusion from the Barclays visit is underlying demand for copper in China is likely to remain strong, as actual grid investment is exceeding target set under the government's current Five-Year plan and the increased targets contained in the next plan.
For the full year demand growth is still expected to be in double-digit territory, especially given increased investment planned for the power sector, extensions and expansions of the subsidies for household appliances, investment in rail networks and higher speed railways and a pick-up in real estate investment growth.
Post its visit to China, Barclays doesn't expect any meaningful bounce in China's overseas buying interest, at least not in the first quarter.
This leads the analysts to suggest markets looking for a resumption of Chinese buying to push prices much higher could be disappointed early in the new calendar year. Imports may pick-up from the second quarter, but there remains scope for high prices to be sustained, so dampening the enthusiasm for re-stocking.
