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New data suggests Q1 copper saw supply-chain squeeze


By Laura Gilcrest


May 12 - Data released the first week of May on the copper market's fundamentals suggest that the market experienced a widespread supply-chain compression, rather than a demand slump in the first quarter of this year, according to some analysts.


But as key players like China continue to put the brakes on economic activity to rein in inflation, some market watchers are less certain how robust copper demand will be in the current quarter and for the rest of the year. See related chart: LME three month Cu sellers Jan-March 2011 ($/mt)


New data released the week of May 2 by the International Copper Study Group showed total reported copper stocks jumped nearly 70,000 mt in January, but there was also a seemingly contradictory copper deficit of 20,000 mt in the same month.


The ICSG data further showed that demand for refined copper shot up by 11% in the year through January, in stark contrast to a 3% year-on-year rise in refined copper production levels during the same period.


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"Such a picture ties in with our view that, despite softer market indicators in Q1 such as rising LME stocks, the key factor behind this was not significantly weaker demand levels but rather a large scale and widespread compression of the supply chain," Barclays Capital said in a report the week of May 2.


"Moreover, given such a compression effect is finite and end-demand remains robust as the ICSG data indicate, bullish momentum in fundamentals is likely to be reasserted when the destocking effect draws to an end during the current quarter."


Commenting on the Barclays report, "William Adams, a market analyst with basemetals.com, told Platts, "I agree the rise in stocks does suggest destocking as consumers avoid paying these prices and yes, destocking can only last a certain period of time."


However, he cautioned, "If stocks are bigger than originally thought, then destocking might well go on for longer than the market anticipates."


Predictably, much of the timing as to when destocking winds down hinges on China, William Adams said, "If copper has been imported [into China] as a means of getting credit and then once imported, the metal is lent to the market and the proceeds used to finance other projects, then there may be a lot of copper in China that has already been accounted for as consumption -- albeit in 'apparent' consumption -- when in effect, it is just sitting in warehouses. If China now clamps down on this form of raising finance, then there may be a lot of metal that needs to be sold."


Referring to the somewhat conflicting ICSG data, market analyst Edward Meir, with Man Financial, told Platts. "It's a bit of a disconnect; if you have a deficit, stocks should not be building."


But he agreed at least part of the explanation is supply compression. Noting that a number of copper producers reported much lower production in the first quarter, Meir said "I think a lot of ore grades are getting depleted, so it's harder to milk the same amount of copper out of existing mines, and you've had weather issues at some facilities," all of which combined to shrink the copper supply chain in the first quarter.


But regardless of what the ICSG data suggest about copper's Q1 fundamentals, analysts agreed that the market is looking to China to reignite demand, but not all agreed on when that might happen, or what it would take.


Now that China's industrial growth has measurably slowed and is now even flirting with contraction, combined with its substantial buildup in stocks, China will be a much more "price-sensitive" buyer, said basemetals.com's Adams, so it could take copper falling to $8,000/mt to lure China back into buying mode. He said copper prices could conceivably sink to $8, 500/mt "in a month or so."


However, market analyst Leon Westgate, with Standard Bank, had a different view. "The actual price level doesn't matter; it's the arbitrage," he told Platts.


Currently, he said, given the current LME and Shanghai Futures Exchange price differential, along with exchange rates and taxes, importers of copper into China would be losing roughly $225 /mt. 'It's really a case of when the arbitrage window opens, and it becomes profitable to take metal back into China," he said.


Westgate added that he was skeptical of a copper demand comeback this quarter. "I think demand will return in the second half at the earliest," he said.


Especially in light of the Chinese central bank's recent pronouncement that it would make curbing inflation a priority over economic growth, he said, "China's return may be longer than people expect."


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