Hong Kong, 17 December 2010

China's State Reserves Bureau (SRB) will buy more refined copper in 2011 even as prices hover near a record high, though analysts say the amount depends on how aggressively the government pushes a build up. The SRB is widely believed to hold more than a million tonnes of refined copper as a strategic reserve to meet its role as a swing player in tamping down prices if needed while ensuring the country's explosive economic growth is not held hostage to sharp breaks in supply.

It's buying plans for 2011, said Hua Tai Great Wall Futures chief researcher Jing Chuan, are key to assessing the direction of global prices at a time of tight supply and as consumption in China is expected to rise 8 percent to 7.34 million tonnes, from 6.8 million tonnes this year, according to state-backed research firm Antaike.

Government directives through five-year plans are as equally as important as market forces including a rumoured mandate to the SRB to hold 2 million tonnes of copper stocks by 2015 to assess SRB buying plans. Analysts say along with policies designed to shrink a massive trade surplus, China could prompt the SRB to aggressive buying next year despite high prices.

AGGRESSIVE CONTRACTED AND SPOT IMPORT BUYS

Rising demand for China's planned power network renovations, may prompt the SRB to increase imports in the first year of the country's five-year plan from 2011-2015, said Jing. He tipped government purchases at 700,000-800,000 tonnes in 2011 and the metal would come from both local and overseas suppliers.

"Government purchases usually do not consider prices so much because the material is for planned projects," Jing said, of LME copper, which hit an all-time record of $9,267.50 a tonne on Nov. 14. On top of the SRBs contracted arrivals for next year, the state body's purchase of spot imports could come from contracted shipments by state-owned firms for 2011 and additional spot orders, which could shift more LME stocks to China.

BUY LOW, SELL HIGH? UNLIKEY

The SRB may have bought 500,000-750,000 tonnes of copper when LME copper prices were below $4,000 a tonne, for delivery in the 2009-2011 period, industry sources said.

As the state body is not allowed to participate in futures trade both locally and overseas, the contracted copper could be imported by state-owned firms, masking the inflow as commercial buying. So SRB may receive some 200,000-250,000 tonnes of imported copper next year and some of the metal could come from the LME stocks.

But the SRB is unlikely to cash in on high prices as China considers it a strategic stockpile, though the agency sold a third of its aluminium and zinc stocks last month via public auctions to help cool domestic inflation. But aluminium and zinc are not classified as strategic materials in China.

"The SRB will import copper next year for sure. It's been doing that for years, however, the amount changes year to year," said state-backed research firm Antaike senior analyst Yang Changhua.

However, Yang said if contracted copper has not been priced, the SRB may cut imports well below 200,000 tonnes next year on high LME prices. "Around 100,000 tonnes would not be too big considering China's consumption plans," Yang said.

Yang thinks the SRB bought more than 400,000 tonnes of refined copper last year from local and overseas suppliers. The state body may have imported some 250,000 tonnes of refined copper in 2009, according to Yang's estimate of that year's SRB total purchases.

Industry sources and analysts estimate of current SRB copper stockpiles range from 1 million to 1.3 million tonnes. Yang told a conference last month that he believed the SRB would only sell copper when domestic demand was large and end-users could not source enough from the market.

OUT WITH THE OLD, IN WITH THE NEW

The SRB regularly rotates copper stocks that have oxidated to keep the metal in good shape and ready for emergency calls and is said to have a short-term plan to replace 150,000-160,000 tonnes of old stocks with new metal.

The status of the rotation is unknown, though if uncompleted, SRB may use next year imports to replace old stocks and sell older supplies directly to state-owned firms to avoid revealing the extent of its trading activity.

Such a scenario could cut spot purchases by those firms, weigh on Chinese prices and close the arbitrage -- buying from the LME and selling to Shanghai - making it unlikely China's overall imports would rise significantly.

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