London, 11 August 2011: Reuters

This week's copper price collapse has accentuated even further China's pivotal role in the next phase of the market cycle. The Great China Restock, the mass return of Chinese copper buyers after a prolonged period of de-stocking and thrifting, was already a core part of the bull narrative for the red metal.

It has assumed even greater importance amid rising market anxiety about the sustainability and strength of economic recovery just about everywhere else. If copper is to make new cycle highs, as the majority of analysts still expect, the assumption is that it will do so only when Chinese fabricators run out of other options and are forced to commit to the import market.

The preliminary July import figures released this morning suggest that The Great Restock has been postponed for at least another month. China's import dynamic, however, may be poised for a step-change thanks to the sharp sell-off in LME copper prices since last Friday.

The only question is whether this will be quite as bullish a price driver as is commonly assumed.

IMPORTS UP ... PROBABLY

This morning's preliminary snapshot of China's appetite for imported copper in July was superficially price positive. Aggregated imports of refined copper, anode, alloy and products, rose by 9.5 percent to 306,626 tonnes from 280,0009 tonnes in June.

It was the highest monthly total since January and, if the January-June ratio split between types of copper held good last month, refined copper imports of around 196,000 tonnes would also be the highest since the first month of the year.

Confirmation will come with the full trade report, scheduled for release on Aug. 21. But the broader trend is still one of year-on-year weakness. Cumulative imports were still down by 22 percent in the January-July period and refined metal imports were probably lower still as buyers continued to eschew refined copper in favour of cheaper types of copper, scrap in particular.

Imports of the latter continue to rise year-on-year, up 2.4 percent in July and up 9.1 percent in January-July. Moreover, there is the not-so-little problem of determining how much of July's imports went to actual copper users and how much went into "limbo" in bonded warehouse in Shanghai.

After contracting sharply during the second quarter bonded warehouse stocks have started rising again. They are currently estimated at 350,000 tonnes, up from 300,000 tonnes at the end of June and still a good deal higher than "normal" levels of around 200,000 tonnes.

That raises the possibility that much of the increase in July import volumes has merely gone to inflate the Shanghai stocks cushion.

IF NOT NOW ...

China's real underlying demand for copper appears to remain extremely robust. July's output of fabricated products was still 17.8 percent higher than year-earlier levels. It's a problematic dataset which overstates actual end-use consumption but is useful in terms of directional trend.

Which is why the 9.0 percent drop between June and July is significant, attesting as it does to the "normal" seasonal slowdown that affects copper fabricators across the Northern Hemisphere, both Chinese and non-Chinese.

That summer slowdown, combined with still-strong domestic production growth has caused a temporary loosening in the Chinese market. Visible inventory in the form of tax-paid metal registered with the Shanghai Futures Exchange hit a three-month high of 102,187 tonnes last week.

Other indicators, such as physical premiums and front-month structure on the SHFE, also implied a market that was enjoying a fair degree of summer supply slack. Which is why there should be no particular surprise if July's "imports" at least partly made it only as far as a Shanghai warehouse, whether it be bonded or non-bonded.

... WHEN?

So when will we see the Great China Restock? Well, somewhat perversely, it is probably starting right now. This week's price collapse may have transformed the Chinese import dynamic, even if it will take at least a couple of months before it becomes obvious in actual import volumes. No buyer, let alone the biggest buyer at the margin, wants to chase prices higher. That's why a copper price starting with a "9" has seen China import only "must-have" metal, normally in the form of tonnage booked under calendar term contract.

A copper price starting with an "8" looks a whole lot more appealing, particularly if there is a sense that the market has stopped falling.

The London "Street" is full of chatter about Chinese enquiries for copper for delivery from September through December, a seasonally stronger period for manufacturing activity.

Interestingly, the SHFE forward curve has just flipped into backwardation , the London-Shanghai arbitrage has narrowed (but is still negative) and physical premiums have perked up from their subdued July levels.

This is probably still only a case of "testing the water". Any further price weakness and Chinese buyers will back off again. But interested they certainly are!

IMPORTS UP, PRICES UP?

This flurry of buying activity serves to underline the point that China Copper Inc, the massed ranks of Chinese copper fabricators, is an extremely price-sensitive player. Such sensitivity runs down through the entire value-added chain. Standard Chartered in a research note earlier this week noted that even the State Grid Company will reduce purchases of copper cable during periods of spiking prices and compensate during bouts of price weakness.

Its underlying need for copper to upgrade and extend the national power grid is undiminished but when it buys and how much it buys is first and foremost dependent on price, particularly when that price is close to historical highs.

China will collectively restock when the price is right and it's a lot more right this week than last week. This is "normal" buyer behaviour but it poses something of a conundrum for those who argue that the copper price will hit fresh all-time highs when the Great China Restock manifests itself.

The recent history of Chinese buying patterns suggests more that the country's import demand will limit the downside than fuel the upside. It did so during the post-Lehman apocalypse and it looks to be poised to do so again, albeit at a significantly higher outright price level.

But if prices start rebuilding back towards the $10,000 per tonne level, there is no reason not to expect the Chinese to revert to de-stocking and thrifting. Indeed, a partial restock at current, or potentially lower, prices will afford Chinese buyers greater flexibility in the event of a new price spike.

This stand-off between market bulls and the world's biggest buyer is all about timing. The Great Restock didn't happen last month. That much is clear from today's preliminary trade report. And if it is starting to happen this month, the impact on actual import volumes will not be apparent for several weeks at the very least.

By that stage the price may well have recovered, ostensibly on the back of renewed "Chinese import demand". But just when it does, you can bet that "import demand" will evaporate just as quickly as it appeared.

The game continues...

Ends --

By Andy Home, Reuters columnist - for Commodities Now.

The opinions expressed are his own.