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Cautious on copper, China waits for prices to halve

London, 24 October 2011: Reuters

Copper will not recover any lustre soon after losing a quarter of its value since July, as China, the metal's top user and last hope in the face of crumbling Western demand, waits for prices to halve before it begins to rebuild stocks. Supply worries stemming from a lengthy strike at the world's second-largest copper mine in Indonesia are being offset by bulging stocks and signs of slowdown in China, which saw its lowest growth in two years in the third quarter amid weakness in its two biggest markets, Europe and the United States.

Coupled with Beijing's tight rein on monetary policy in the world's No. 2 economy, which consumes about 40 percent of the world's copper, the spectre of global recession has kept the metal struggling around $7,000, falling below that level in Thursday's near 7 percent drop, its biggest loss in a month.

Copper, a gauge of global economic health because of its use in applications from construction to power, is now 31 percent off February's record of $10,190. But China,  pinched by tighter liquidity and a lack of stimulus cash, is unlikely to recover its appetite unless prices become even more of a bargain.

"Credit is tight and financing costs are around 25 percent at the moment, while future demand looks uncertain, so no one in China is building inventories beyond their immediate needs," said Du Xiao Hua, a trader at Shanghai Dongzheng Futures.

"The State Reserves Bureau last came in to stockpile when prices were around $3,000. Maybe they will come in if LME prices fall to $3,500," he said, referring to the state manager if the country's copper reserves. During the 2008 global financial crisis, when copper prices were around $3,000 a tonne, China restocked commodities ranging from oil to grains and base metals, backed by a massive 4 trillion yuan ($626 billion) stimulus budget.



While Chinese consumers have been replenishing on a hand-to-mouth basis, the prospect of copper hitting more troughs ahead increases the possibility of the Chinese stepping in to buy as further price falls open the arbitrage window, when the London metal is at a discount to Shanghai. That discount widened to nearly 3,000 yuan ($470) a tonne this month, including China's 17 percent value-added tax. It was the highest since October 2008, and came around the time when LME copper fell to its 2011 low of $6,635, according to Reuters data.

"If you really have to name a price for restocking, you may argue that $4,000 is attractive to buyers since it is the current marginal cost now, and can be seen as the theoretical bottom," said Judy Zhu, a commodity analyst at Standard Chartered Bank in Shanghai.

A Reuters poll of 23 analysts showed they have cut their average forecast for copper to $8,950 a tonne next year, from a previous estimate of $9,995 in a July poll, citing a fragile outlook for the global economy.

"The Chinese government needs to see a good opportunity to buy. I think they would start to think anything below $6,000 will become an attractive opportunity for them to strategically rebuild stock," said Dominic Schnider, executive director for wealth management research at UBS.

But Dongzheng Futures' Du said instead of waiting to see how low copper prices can go, potential buyers should be looking for a sustained rise in prices. "People will buy when confidence returns and a price rise is sustained. If the demand outlook is good, people will buy even if prices shoot back up to $9,000 now," said Du.


Ample stockpiles are another reason for China's slight appetite for restocking. The State Reserves Bureau is estimated to hold between 1 million and 1.3 million tonnes of the metal, according to industry sources in September. In addition, state-backed research firm Antaike has predicted China's private stocks, including those in bonded warehouses, would be about 500,000 tonnes by the end of this year.

But with Chinese borrowers increasingly putting up copper as loan collateral, falling prices could deflate the value of stockpiles, said U.S. intelligence firm Stratfor. "Such a collapse would result in a much worse outcome for Beijing and would parallel similar problems China faces in managing bubbles in, for instance, real estate," Stratfor said in a report.

China has reduced its stockpiles by at least 300,000 tonnes so far this year, estimates Fairfax mining analyst John Meyer. Fairfax expects a modest 2 percent rise in China's refined copper consumption to 7.6 million tonnes in 2012, less than half of its projected increase of 4.6 percent for this year, as a drop-off in consumer confidence in the eurozone and the Western world in general strains emerging economies.

Projecting global copper consumption to increase by 2.1 percent to 20.486 million tonnes next year, Fairfax said it was looking at a deficit shrinking to 150,000 tonnes from this year's estimate of 205,000 tonnes.

RBS commodity strategist Nikos Kavalis is also looking at a global supply gap of 150,000 tonnes next year from a forecast deficit of 450,000 tonnes in 2011. China's consumption should grow 6.5 percent to 8.2 million tonnes in 2012, representing 41 percent of projected global demand of 19.9 million tonnes, said Kavalis.

"If this were to prove optimistic, and that growth were to go down to 5.5 percent, this deficit would very easily become a surplus," said Kavalis. "If China's tightening carries on or if the Western world ends up in a recession and this affects Chinese demand, a lot of people are worried that we may see far weaker conditions."


As growth in copper consumption slackens, recent supply disruptions have failed to prop up copper prices, as exemplified by strike-hit Freeport-McMoRan Copper & Gold Inc's Grasberg mine in Indonesia. Grasberg, now operating at two-thirds of its capacity, said on Wednesday that an eight-day strike in July and a second, continuing strike that began on Sept. 15, led to a loss of about 70 million pounds of copper, or nearly 32,000 tonnes.

Because of output disruptions due to industrial action, weather and other factors, some analysts have factored in disruption allowance in their supply-demand estimates for next year.

RBS expects such disruptions to reach a hefty 1.45 million tonnes in 2012, said Kavalis. But even a year-long shutdown of Grasberg may not adversely impact global supply, particularly if Chinese demand slows.

The Indonesian mine produces around half a million tonnes of copper in concentrate every year, Reuters data show, or about 2.7 percent of this year's estimated global demand of 20 million tonnes.

"It may well be that the slowdown we're going to see in European demand is more than what we're going to lose from the Grasberg strike," said Citigroup analyst David Thurtell. ($1=6.386 Chinese yuan).

Ends --

Reuters - for Commodities Now wtih permission.