By Andy Home
LONDON- A rare burst of Chinese exports has deflated bull spirits in the copper market, with funds dumping long positions and prices down by 16 percent from the record highs seen in May.
The world’s largest buyer of copper shipped out an unprecedented 158,000 metric tons of refined metal in June. First-half exports of 302,000 tons were already higher than any full calendar year since 2019.
This break of normal trade patterns has punctured a bull narrative of constrained supply and cyclical demand recovery.
Weak Chinese purchasing managers indices show that activity in the country’s manufacturing sector sank to a five-month low in July, reinforcing Doctor Copper’s gloomy message.
Yet demand weakness is only part of the story.
Fast-rising domestic production and a flood of African imports have saturated the local market. And then a ferocious squeeze on the CME contract in May opened an equally unusual export arbitrage window for that excess to flow out.
China produced 5.9 million tons of refined copper in the first half of the year, according to local data provider Shanghai Metal Market. That represented year-on-year growth of 6.5 percent , equivalent to an extra 359,100 tons.
The robust growth rate runs counter to expectations that domestic production would fall after the country’s smelters committed in March to curtail output due to tight raw materials supply.
It’s true that many smelters have taken maintenance downtime in recent months, but the cumulative impact has simply been a moderation of the supercharged rate of expansion.
Rising smelter output has coincided with a period of high refined copper imports.
Although the export burst has significantly reduced China’s net call on the international market, the country’s imports have remained strong. Volume rose by 16 percent year-on-year to 1.9 million tons in the first six months of 2024.
China also imported significantly more scrap copper, volume increasing by 18 percent year-on-year to 1.2 million tons in January-June.
Chinese demand would have had to be super-strong to absorb the simultaneous combination of more domestic and more import supply. Clearly, it wasn’t strong enough.
The core driver of China’s higher metal imports has been the Democratic Republic of Congo (DRC). The country last year overtook Peru as the world’s second-largest copper producer and shipped more metal to China than top producer Chile.
Trade flows between the two countries continue to accelerate, with China’s imports jumping by 91 percent year-on-year to 698,000 tons in January-June. The June tally of 150,000 tons was a new monthly record.
Given China’s dominant role in DRC’s copper-cobalt mining sector, trade flows between the two countries are unsurprising.
However, it’s also the case that there is no other equivalent market for Congolese copper, including the world’s big three exchanges.
The London Metal Exchange (LME) currently has only one Congolese brand on its good delivery list – “SCM”, produced by La Sino-Congolaise Des Mines with annual capacity of 82,400 tons.
DRC copper is not deliverable against either the CME or Shanghai Futures Exchange (ShFE) contracts.
With Chinese demand insufficiently strong to absorb surging imports, Congolese metal has washed around the domestic market, dragging down both premiums and prices to the detriment of local smelters.
CME’s limited good-delivery list of copper brands is one reason the US contract got squeezed so badly in the second quarter.
Stocks fell to just 8,117 tons at the start of July, as shorts found their capacity for physical delivery largely confined to US Canadian or Latin American brands.
Inventory has since rebuilt to 23,620 tons, but it has been a painfully slow process. – Reuters
