Get your free copy of Editor’s Digest
FT editor Roula Khalaf picks her favourite stories in this weekly newsletter.
Chinese warehouses are building their biggest copper surplus in four years after high prices and sluggish consumer demand led manufacturers in Asia’s largest economy to shy away from buying the world’s most important industrial metal.
Gold stocks in Shanghai Futures Exchange warehouses hit about 330,000 tonnes this month, the highest level since 2020, according to Bloomberg data. The last time they reached that level was in 2015.
The surplus metal “cannot be consumed,” said Zhang Jiefu, a senior analyst at Zhengxin Futures Exchange, adding that wire and cable makers were under “great pressure” due to the slump in China’s property sector.
Copper is widely used in building construction, electrical wiring, plumbing and household appliances.
The buildup of copper inventories highlights the vulnerability of the country’s industrial sector, which curbed demand when a U.S.-led speculative trading frenzy sent copper prices soaring to a record high of more than $11,000 a tonne last month.
Inventories in warehouses linked to the world’s largest metals exchanges fill when the market is oversupplied and empty when demand rises, so are used by traders and analysts as a key indicator of market strength.
“If you’re a copper producer in China, you have every incentive to reduce your own inventories and pull back on purchases from the market because demand is decent but not the best and global prices are rising sharply,” said David Wilson, commodities strategist at BNP Paribas.
The rise in copper inventories reflects a sluggish property market and weak manufacturing and credit activity as the Chinese government avoids directly stimulating household consumption.
In the four weeks since hitting an all-time high, copper prices have fallen 13% to $9,600 a tonne due to weak demand from China.
Copper inventories typically build in the first few months of the year and then start to fall as factories resume production after the Lunar New Year holiday, but this year the buildup has continued for longer than usual.
In contrast to the situation in China, traders have warned that global copper stocks remain dangerously low, with only a few days’ worth of supplies stored, posing the risk of a price spike, they say.
Weakness in the Chinese market has led copper delivered to Shanghai to trade at a discount to the global benchmark price, an unusual move.
However, Chinese copper processors appear to have started buying copper again very recently, with inventories declining slightly over the past two weeks.
Still, rising copper inventories signal the disruption the industry faces from a global smelter glut. Indonesia, India and the Democratic Republic of Congo are all set to follow China’s lead and significantly add to their smelting capacity in the near future.
“This is the largest amount of new smelter coming online in the last 12 to 24 months,” Wilson said.
The closure of a huge mine in Panama late last year and a cut in copper production forecast by the world’s largest mining company led analysts to predict a shortage of the metal as smelters compete for limited raw material.
Fund managers took notice of the developments earlier this year and bet on higher copper prices, but a physical copper shortage never materialized, in part because the Democratic Republic of Congo managed to ramp up mining production and China ramped up scrap processing, helping ease the supply situation.
Qin Jingjing, chief non-ferrous metals analyst at SDIC Securities, said excess copper inventories in China were partly due to smelters not cutting production except for annual maintenance, despite proposals to cut production floated in March.
But prices have fallen recently and “the question now is whether a drop of 10% or more would be enough to change sentiment in China,” JPMorgan analysts said in a note.
Some analysts have argued that copper prices could rise later this year due to pent-up demand. “If prices come down, people will take advantage of this opportunity,” said Boris Mikanikurezai, an analyst at FastMarkets, a commodity information provider.
But prices could fall further this year if some of the funds that had been buying the metal turn bearish and start shorting, betting prices will fall, said Daniel Smith, head of research at London-based metals broker AMT.
“China is going through a period of softness,” he said. “I think there’s a danger in putting too much emphasis on copper.” [the price has fallen too far] This year, if funding is tight, it could fall to as low as $9,000 a tonne.”
