LONDON (Reuters) - China is likely to return to the copper market and vindicate predictions of a deficit this year, easing current concerns that its absence could fuel a surplus.
The second quarter is when China traditionally buys copper ahead of strong construction and industrial activity in the third quarter. But this year purchases have been deferred, mostly because of record high prices.
Those in China who need the metal, which is valued for its ability to conduct electricity, have resorted to using stocks built up since late 2008 when benchmark copper prices on the London Metal Exchange fell below $3,000 a tonne.
"Yes, people are talking about the potential for a balanced market or even a surplus. But it's still likely that we'll see a small deficit this year," said Max Layton, an analyst at Macquarie.
"Chinese consumers have destocked; scrap has also almost been fully destocked," he added.
Chinese copper imports in the first five months of this year fell 25.3 percent from the year before to 1.42 million tonnes. May copper imports plummeted 35.8 percent from May 2010.
"If you had asked anyone at the start of this year what would have happened if Chinese imports collapsed, the answer would have been, copper will drop like a stone," Layton said.
But LME prices now at around $9,000 a tonne are only about 10 percent below the all-time high of $10,190 a tonne hit on February 15.
Unease about China's absence has grown. The world's largest copper consumer accounts for nearly 40 percent of global consumption, estimated at around 21 million tonnes this year.
In a Reuters survey in January, analysts on average forecast a market deficit at 444,000 tonnes for 2011. That would exceed the 2010 deficit of 305,000 tonnes, according to the International Copper Study Group.
Analysts say the copper market will probably see a surplus for the first half of 2011.
"We're still expecting a small deficit (by the end of the year)," said Michael Widmer, an analyst at BoA Merrill Lynch. "April was a huge month in terms of destocking."
Estimates of China's destocking are the basis for expectations it will return to the market.
"China has been destocking massively; last year they were stockpiling. Falling Chinese imports reflect them using up stocks," said Stephen Briggs, an analyst at BNP Paribas.
"I believe there will be an underlying deficit this year, by underlying I mean production falling short of real physical consumption ... The problem is we don't know how much stock there is in China."
Inventories of copper in warehouses monitored by the Shanghai Futures Exchange at 83,275 tonnes are about half the levels seen late March, but these numbers only scratch the surface as the focus is on unreported stocks.
Earlier this year unreported stocks were estimated by some analysts at 600,000 tonnes or above. But that number is now said to be about 200,000 tonnes lower.
"If they destock at 150,000-200,000 tonnes a month, they will run out of copper very soon. Imports will have to go up," Macquarie's Layton said
EARLY WARNING SIGNAL
An increase in Chinese imports are likely to show up in LME stocks, particularly cancelled warrants, an early warning signal of material due to leave warehouses.
LME stocks at above 470,000 tonnes are the highest in more than a year and are up about 35 percent since early December 2010.
Investors looking for clues should watch LME warehouses in South Korea, from which material is normally shipped to China.
LME data for Monday showed copper cancelled warrants at around 3.5 percent of LME stocks, while those in the South Korean location of Gwanyang were above 6 percent.
For now, though, stocks due to leave LME warehouses are headed for locations elsewhere in Asia, which accounts for about 25 percent of global demand, analysts say.
"Asia ex-China demand is actually quite robust and growth in Asian economies has been pretty copper-intensive," Layton said, adding that demand in Asia excluding China was up 10 percent in January/February from the same period a year ago.
"That bodes well for prices when China returns to the market in the second half of the year."
(Reporting by Pratima Desai; editing by Jane Baird)