Copper held in bonded warehouses has been building up in recent weeks due to a combination of weak domestic demand and the negative SHFE-LME arbitrage, according to CRU consultant for copper demand and markets, Matthew Wonnacott.
Copper cathode in bonded warehouses in Shanghai is believed to total around 700,000t. In all of China, stocks are estimated at about 770,000t, according to Wonnacott.
"If you're a trader in China at the moment, you are not going out to the market ex-China looking for material to import because of the negative arbitrage. But if domestic demand picks up, import losses narrow and you'll see people going out looking for material again," Wonnacott told BNamericas.
Most analysts, including CRU, believe that Chinese end-user demand for copper will pick up in Q2. CRU is forecasting refined copper consumption will grow 6.5% in the second quarter, compared to an estimated 2.5% year-on-year growth in Q1.
"Mostly it's about Chinese domestic demand which needs to pick up to close the SHFE-LME arbitrage," Wonnacott said. "Once that closes, you also have the domestic spot market, that will also go at a premium to the SHFE price, closing losses even further."
Wonnacott believes there is a "misunderstanding" about how copper financing is done. "It is possible that 80% or more of imported copper has been used in financing deals, but it's not in collateral, it's just as it enters the supply chain along its way to the end user," he said.
Copper is used in financing because it is a useful vehicle for getting letters of credit and getting cash into mainland China, according to the consultant. "That is very different from 80% of copper just sitting there in a stockpile," he said.
Collateral for loans is not a huge part of the copper market, according to the expert. "When you go to the bonded warehouses, a lot of the copper is new cathode, only about six months old, so it can't have been sitting there as collateral for months or years," Wonnacott said. "What is sitting there is waiting to go into the domestic market."
CORPORATE BOND DEFAULT
China's first corporate default implied a systemic risk and this affected copper because the red metal is so exposed to China, according to Wonnacott.
China consumes around 40% of global copper production.
"If the risk is there that more companies default, it implies a systemic risk. The whole system is interconnected in China so the worry is that if one goes, quite a few could go," Wonnacott said.
CRU does not believe the bond default is related to copper financing, as has been suggested by reports.
"We don't believe the two are really related at all," Wonnacott said, adding: "Of course, if the bond default causes a wide scale economic problem, other financing would get caught up but it becomes a general problem for a lot of markets, not just for copper."
Copper closed Thursday at US$2.985/lb on the London Metal Exchange, up from the previous day's US$2.973/lb. The red metal has been trading below US$3/lb since March 12.
The first of a two-part interview with Matthew Wonnacott will be published in this week's Perspectives, for subscribers only.
CRU will present its final copper market forecasts at the World Copper conference, to be held in Santiago, Chile on April 7-9 as part of Cesco Week.