Downward pressure on copper prices might continue because of “a large overhang of inventory” due to rising unreported stocks of copper in China, according to Ross Strachan, a commodities economist at Capital Economics.
Strachan believes the conventional method of estimating China’s copper consumption, which does not include changes in unreported stocks, has been exaggerating industrial demand since the middle of 2011.
He said the method currently used is a calculation of an “apparent consumption,” which is assumed to be equal to domestic production of refined copper, plus net imports, minus reported stock changes.
But changes in unreported stocks “can be significant and there are three reasons to believe that this is particularly the case in China,” Strachan said.
China has at times made official purchases of copper both at a national and at a provincial level, unlike most countries. Strachan pointed to early 2009, when China’s State Reserve Bureau (SRB) bought substantial amounts for strategic reserves.
This, he said, lead to a dramatic increase in imports and, because they were not placed on the Shanghai Futures Exchange – the only reported copper stocks in China – apparent consumption surged.
Another reason is the fact that there is no official reporting of stocks held by consumers or producers in China, therefore any fluctuations of these would show as changes in apparent consumption; also, there are many investors who hold copper speculatively and others who use it as collateral for financing, Strachan said.
Focusing on the output of copper products rather than on apparent consumption would be a better estimate, he argued.
“Copper products are less likely to be held for investment or speculative purposes and are also not known to be stockpiled by either the SRB or provincial governments,” Strachan said. The difference between the two measures – growth rate of copper products and apparent consumption - can be used to assess changes in unreported stocks; on this basis, Strachan estimated that unreported stocks of copper in China have risen by around 750,000 tonnes over the past year.
“Of course, any such estimate can only be guesswork. However, such a large overhang of inventory would maintain the downward pressure on prices even if end-user demand does pick up,” he said.