Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The biggest glut of copper in four years has built up in Chinese warehouses, after a price spike and tepid consumer demand prompted manufacturers in Asia’s largest economy to pull back on buying the world’s most important industrial metal.
Stocks of the metal in Shanghai Futures Exchange warehouses have grown to their highest level since 2020 at about 330,000 tonnes this month, according to Bloomberg data. Before then, the last time they hit this level was in 2015.
Zhang Jiefu, senior analyst at Zhengxin Futures, said the excess metal “simply cannot be consumed”, adding that wire and cable manufacturers are under “tremendous pressure” because of the downturn in China’s real estate sector.
Copper is widely used in electrical wirings, plumbing and household appliances when building construction ends.
The build-up of copper inventories highlights the fragile state of the country’s industrial sector, which reined in demand when the red metal surged to a record high above $11,000 per tonne last month on a speculative trading frenzy led by the US.
Stocks at warehouses linked to the world’s largest metals exchanges are used by traders and analysts as key indicators of market strength, as they fill up when a market is oversupplied and deplete when demand is high.
“If you’re a copper manufacturer in China, then you have every incentive to run down your own stockpiles and hold off buying from the market because demand is OK but not stellar and global prices have surged,” said David Wilson, commodities strategist at BNP Paribas.
The rise in copper inventories reflects China’s real estate downturn as well as sluggish manufacturing and credit activity, as Beijing shies away from directly stimulating household consumption.
In the four weeks since the record high, copper has fallen 13 per cent to $9,600 per tonne, weighed down by weak Chinese demand.
Copper inventories usually build up in the first few months of the year and start to be drawn down in the spring after the Chinese Lunar New Year holiday as factories increase production again. However, this year the rise in inventories has gone on longer than usual.
In contrast to the situation in China, traders have warned that global copper inventories are still at dangerously low levels with only several days’ worth of consumption in back up. This, they argue, creates a risk of volatile price surges.
The weak market in China has led copper for delivery to Shanghai to trade at a discount to the global benchmark price — a rare occurrence.
However, it appears that Chinese copper fabricators have very recently started buying the metal again, with inventories recording slight decreases in the past two weeks.
The build-up in copper stockpiles nevertheless points to the upheaval that the sector faces due to a global oversupply of smelters. Indonesia, India and the Democratic Republic of Congo are all set to follow China in adding significant smelting capacity soon.
“This is the biggest volume of new smelter capacity in a 12 to 24 month period we’ve ever had,” said Wilson.
At the end of last year, the closure of a giant mine in Panama and cuts to copper production guidance by the world’s largest mining companies led analysts to expect metal shortages as smelters fight for limited feedstock.
Fund managers latched on to that earlier this year and placed bets on rising copper prices, but the physical shortages did not materialise. In part, that was because the DRC has managed to boost output at its mines, while China has processed more scrap, helping to alleviate the supply situation.
Qin Jingjing, chief non-ferrous metals analyst at SDIC Securities, said that the build up of excess copper in China was also due to the fact that smelters did not reduce output — other than for annual maintenance — despite floating the idea of production cuts in March.
But with prices having recently fallen, “now the question is whether the more than 10 per cent pullback is enough to change sentiment in China”, said analysts at JPMorgan in a note.
Some analysts argue that the copper price could rally in the second half of the year as a result of pent-up demand. “With the decline in price, we’re going to see people take advantage of this,” said Boris Mikanikrezai, analyst at Fastmarkets, a commodities information provider.
However, Daniel Smith, head of research at AMT, a London-based metals brokerage, said that prices could fall further this year if some of the funds that had been buying the metal start turn bearish and start shorting — betting on a falling price.
“China has hit a soft patch,” he said. “I think the danger is we’ve done too much on copper [the price has fallen too far] this year and if the funds go short on it, then we could go back down to $9,000 per tonne.”
