Barclays: Global refined copper imports gains to highest level in 16 months

Barclays: Global refined copper imports gains to highest level in 16 months

Prices rebounded firmly on Friday as whims in macro sentiment continued to drag the complex around in a volatile fashion. Copper and Lead rose by 6-7% on the day, reported Barclays Capitals.

Despite a fair bit of uncertainty surrounding the euro zone crisis as EU leaders deferred final decisions on their strategy until a second summit on Wednesday, base metals prices have surged this morning with copper rising above US$7400/t, recouping most of the losses last week. One of the key drivers would have been China's October HSBC flash PMI.

The latest October reading rose to 51.1 from the final readings of 49.9 in August/September, with the gain mainly attributable to the pick-up in new orders and output, according to the HSBC report, and strengthening export orders. Meanwhile, factory price pressures eased, with the input price index falling to 54.3 from 58.8 in September.

According to Barclays the latest September data point to modest upside risks to our Q4 GDP forecast of 8.3%, which should help to balance the downside risks from a possible weakening in external demand. Following the uplifting of PMI data, the final China trade data released on Monday also indicates continued healthy Chinese appetite for base metals. Refined copper imports rose to the highest level in 16 months and continues the upward trend since May this year. At 275Kt, September imports are up by 14% y/y and 17% m/m.

Nevertheless, on a YTD basis, such strong import levels are not as yet sufficient to offset the weak import levels earlier this year. YTD import levels are still down by 21.9% y/y. What is interesting is also that more refined copper are arriving from India suggesting that Indian smelters might have gained market share as Japanese smelters lost capacity owing to the earthquake earlier this year.

The strength of September imports have not been surprising given:
(i) the SHFE-LME spread that is favourable for imports through August until now; and
(ii)the SHFE curve moving into backwardation in August.

The strong spot demand stems largely from anticipation of seasonally stronger demand in Q4 but could also be supported by domestic refined copper production showing signs of moderating from highs, traders willing to bring in spot material as LME prices declined during September and some shipments possible being brought forward in view of the Golden Week holidays in first week of October.

Copper concentrate imports have eased from August level (second record high), down by 17% m/m and 18% y/y. Such weakness is more likely owing to the lack of availability of concentrates, with endemic labour issues and declining ore grades, rather than weak demand by domestic refined smelters. Miners' talks of more regular negotiation of TC/RCs and hence the prospect of lower TC/RCs as supply disruptions become more frequent could arguably affect smelters' motivation to maintain concentrate demand.

But with secondary scrap supply remaining tight as scrap producers are reluctant to sell at weak prices, cathode demand has been supported and smelters would likely be motivated to suffer lower TC/RCs in order to maintain cathode output. In order to meet such cathode demand, domestic concentrate output and scrap imports in September have both hovered near record highs, with Q3 scrap imports at its highest in the last two years, despite delays in scrap imports due to extensive inspection of scrap cargoes and limited scrap trade globally on low prices.

In terms of global data, the International Copper Study Group monthly data showed the refined copper market was in a 18Kt surplus in July. Refined production (1.63Mt, flat y/y) outpaced refined consumption (1.62Kt, -3% y/y) over the course of the month. However, the market is still in a 118Kt deficit for the year as a whole.

July was the third consecutive month that global refined copper demand has fallen in y/y terms, although for the year-todate overall demand levels are still up by 2.1%. In terms of regional breakdown, in July, the ICSG stated y/y declines in demand in China (-3.5%), Europe (-2.5%), North America (-9.6%) and Japan (-15.5%). The other area of weakness in the data was in terms of mine output performance in July. Mine production fell 7% y/y during the month to 1.27Mt, with declines in Indonesia (-31Kt y/y, -39% y/y) and Papua New Guinea (-10Kt y/y, -66% y/y) key factors.

Remaining on Indonesia, Freeport McMoran announced on Friday that it had resumed talks with labour union at its Grasberg mine with a view to ending the month-long strike. This followed the deaths of three men on an access road to the mine on Friday, following a similar incident a week earlier. It was also reported (Reuters) that the pipeline carrying concentrate from the mine to the port has started leaking, but that mine workers were currently unable to review the issue due to security forces closing down the access road.

The latest CFTC data showed speculators moderately reduced the size of short positions in COMEX copper futures contracts for the week ending 18th October. New short positions fell 1.7K lots to 5.3K lots by the end of the week, largely owing to a 1.6K lot position reduction on the short side.