April 15, 2015 / 1:01 AM / 4 years ago

RPT-COLUMN-As copper industry meets in Chile, all eyes on China: Andy Home

(Repeats April 14 column with no changes. The opinions expressed here are those of the author, a columnist for Reuters)

By Andy Home

LONDON, April 14 (Reuters) - It’s that time of year when the copper industry gathers for CESCO Week in Chile to chew the collective fat on what the future holds.

This year’s event takes place against a confused and confusing market backdrop.

The London price for three-month delivery has recovered from its January swoon to five-year lows down at $5,340 per tonne. But the recovery lost momentum at a late-march high of $6,295 and prices are once again heading south.

Visible stocks have soared since the start of the year, particularly those held by the London Metal Exchange (LME), but the LME contract remains backwardated with over half of those stocks under the control of a single entity.

Analysts are split between rampant bears calling for much lower prices still and cautious bulls worried about the accumulating supply side hits that are eating into this year’s expected surplus.

In Chile this week the focus will be firmly on supply, inevitably given the structural problems facing operators in what is still the world’s largest copper producing nation.

But in truth the present confusion is all about the state of demand, first and foremost that in China, the power-house of recent consumption growth.


The backdrop to this week’s copper gala in Santiago has been less than auspicious with local producers only slowly recovering from last month’s heavy rains, which forced several mines to suspend operations.

The overall impact on production is still uncertain but likely to be pretty modest.

However, it is another entry on the debit side of the supply ledger this year. The list is lengthening and analysts’ supply disruption allowance, itself a mark of copper’s perennial production woes, is rapidly filling up.

The whittling away of this year’s expected surplus, which would be the first in many years, is starting to fracture a previously bearish analyst consensus.

Ironically, though, it is the lack of rain in Chile that poses one of several underlying challenges to the country’s production.

Years of drought have strained relations between copper miners, who use massive amounts of water, and local communities. The current court-room battle over Antofagasta’s Los Pelambres mine is symptomatic of what is becoming a structural issue for Chile’s copper sector.

So too are declining ore grades at many Chilean mines and the political difficulties facing Codelco, state-owned leviathan, in securing sufficient investment to sustain production.

Chilean copper production growth was flat last year at 5.78 million tonnes. It is forecast to grow to 5.94 million tonnes this year, although state copper commission Cochilco has also been lowering its expectations.

Beyond the next year or so, though, the outlook for sustained growth is cloudy at best.

And so too is the broader global supply picture. Even the most bearish commentators will concede that copper is likely to move back into structural supply deficit and a higher-price environment in a few years time.

But it’s what happens in the next few weeks and months that will be exercising copper executives this week.

And that’s a question about China.


Nothing new there then.

Copper’s fortunes have been inextricably linked to China for many years because the country has been the single most important driver of global copper usage growth for many years.

China’s role in copper pricing is amplified by the fact that it depends on imports to satisfy its demand for the red metal. The country is the market of first resort for the Chilean producers currently attending CESCO Week.

But China’s import patterns have evolved over time, as shown in the graphic below.

****************************************************** Graphic on China's copper imports 2003-2014: link.reuters.com/zum54w ******************************************************

The first stand-out is the growth in imports of copper concentrates. They have mushroomed from less than three million tonnes (bulk weight) in 2004 to almost 12 million tonnes last year.

The short-term driver of that explosive growth has been much-improved supply as copper mine production flourishes after years of under-performance.

The longer-term driver has been China’s own build-out of smelting and refining capacity, a transference of import dependency from refined metal to raw materials.

The second stand-out is the decline in China’s imports of scrap, itself a raw material input for both copper producers and processors.

In volume terms China’s scrap imports peaked at around 5.8 million tonnes in 2007-2007. Last year they totalled just 3.9 million tonnes, although a shift to higher grades has mitigated some of the headline decline.

Imports of refined metal, the most important barometer for copper pricing, to some extent reflect the interplay of the other two trends.

Higher concentrate imports mean higher Chinese refined metal production, which means less refined import appetite. Lower scrap imports, by contrast, mean reduced domestic production and increased use of refined metal by processors, both of which mean greater import appetite.

So far so, er, simple.

The real problems for copper players come when trying to gauge shorter-term trends in China’s buying patterns.


The Chinese growth machine is slowing. That much is uncontested but the impact on the country’s copper consumption, and by inference on its import demand, is currently hotly contested by analysts.

The unwind of China’s property bubble is the most obvious negative, but just how negative depends on your view of how sustained and how deep will be the current downturn in commercial construction.

The continued build-out of China’s infrastructure is the most obvious offsetting positive, but just how positive depends on your view of contributors such as National Grid investment, itself a conundrum with multiple moving parts.

Adding an extra layer of complexity to an already complex picture is the copper financing trade, the use of metal in bonded Chinese warehouses as collateral against lending in the shadow credit markets.

This financial driver of import flows has created an opaque stocks mountain matching what is visible everywhere else in the world and fed a booming entrepot trade. That trade in turn has hopelessly distorted any straight read-through from imports to the state of real manufacturing in the country.

****************************************************** Graphic on China's trade in refined copper: link.reuters.com/cym54w ******************************************************

After Qingdao and last year’s multiple pledging scandal, the collateralised credit business has shrunk but it has not disappeared.

Credit issues of another kind, meanwhile, are further blurring the Chinese copper picture.

A general tightening of credit to industrial players, particularly smaller processors, is altering the supply chain with consumers forced to run leaner inventories and increase their dependency on shorter spot-market trends.

Right now, with prices weak and in danger of falling further, the result is a lack of buying activity. Things, however, could quickly change in the event end-use order flows pick up in tandem with the price.

The only sure conclusion is greater volatility in buying patterns going forwards.


And all that without mentioning China’s national stockpile manager, the State Reserves Bureau, which can be expected to keep a finger on the buy button in the event of further price falls.

In short, everyone’s waiting for a clearer signal from China but the problem is that the country is transmitting too many signals, many of them conflicting, to form a coherent picture.

Even Chinese funds, which led the bear charge back in January, appear to be split in their views of what happens next.

They do, however, have the advantage over the rest of us of being closer to the action, however confusing that action is.

The view from Santiago is as blurred by the differing smoke signals rising from China as that from London or New York.

Chile may still make more copper than any other country. But pricing is increasingly made in China. And never more so than right now.

Editing by Susan Thomas

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