One critical question facing copper-market participants at the conference was why China’s copper imports have been so strong since September. The latest trade data (for February) showed that preliminary copper imports rose 50% y/y to 420 thousand tonnes (kt), just 5% down from January and 10% lower than the average in Q4-2015. Conversations with market participants offered four key drivers supporting the level of imports. First, H2-2015 was dominated by fears of sharp CNY devaluations versus the USD, which would make imports of copper more expensive. As a result, China’s fabricators bought more cathode than usual, seeking to limit the potential cost impact. It was generally observed that the People’s Bank of China’s (PBoC’s) CNY management since the LNY holiday had settled these concerns to some extent. We expect a relatively benign environment for the CNY in 2016, and therefore that this currency-related restocking will moderate.

Second, another import driver was the relative weakness in Yangshan copper premia versus last year’s long-term contracted premium (USD 130/tonne, ‘t’) and 2016 terms (USD 98/t). Alongside the lower price environment and fears of CNY devaluation, this supported fabricators’ and traders’ appetite for cathode purchases. Contracted tonnage volumes for 2016 potentially fell 20-30%, leaving China’s traders and fabricators with a larger discretionary volume to be purchased from the spot market early in 2016. While Yanghsan premiums dropped from close to USD 100/t in January to USD 70/t currently, until the domestic copper discount narrows or Yangshan premiums falls further, spot demand was seen limited. In this respect, further builds in bonded stocks were expected through March

Third, another key support for imports early in 2016 was the State Reserve Bureau’s (SRB’s) copper purchases in January. The SRB clearly signalled that it was tendering for 150kt of cathode from domestic smelters early in the year, and purchases were completed within the month. This tightened the domestic market temporarily and boosted refined imports. There was also discussion of potential commercial stockpiling being undertaken in China. Although not officially confirmed, media reports in December noted that the China Development Bank (CDB) had allocated a three-year interest-free loan to producers of various metals to use for commercial stockpiling. The tenor of the loans suggested the goal was to remove the metal from domestic markets for a substantial period of time. It was reported that at the time, a CNY 9bn loan had been offered to copper producers, which would equate to just under 250kt of copper cathode at current Shanghai Futures Exchange (SHFE) prices. This commercial stockpiling has been undertaken in China’s aluminium sector, but it remains unclear whether this has been the case in copper.

Eoin Treacy's view

Copper prices are currently about half of their peak 2011 value and this chart of the futures curve highlights how small the spread is between the various contracts. At only a 2¢ over three years the curve suggests the market is in relative balance. 

Copper has rallied impressively over the last two months to close the overextension relative to the trend mean and to test the four-year progression of lower rally highs. Some consolidation in this area is to be expected and copper will need to hold the psychological $2 area on any pullback to demonstrate demand returning at progressively higher levels. A sustained move above the trend mean will be required to break what has so far been a consistent downtrend. 

Antofagasta represents a high beta play on copper and is also testing the region of the trend mean.