August 15, 2013 6:31 pmDemand surges for copper in ChinaBy Jack...

August 15, 2013 6:31 pm

Demand surges for copper in China

By Jack Farchy

One of the most closely watched indicators of the strength of the Chinese copper market has risen to the highest level on record, in a further sign that the country’s industrial economy is outperforming gloomy expectations.

Chinese copper premiums – that is, the cost of physical copper over and above the benchmark futures prices – have more than tripled since the start of the year to a high of more than $200 a tonne, traders

The rise in premiums, which are closely tracked by traders and analysts as an indicator of the strength of the physical market, reflects surprisingly robust demand in China, traders say, though it has also been underpinned by a variety of other factors.

“Everybody got themselves a little bit over-bearish,” said one senior metals trader. “There is an increasing chance we are underestimating Chinese copper consumption.”

The rise in copper premiums will reinforce the recent shift in sentiment towards China, about which the western investor community had become deeply pessimistic over the summer. A raft of data on Chinese trade, industrial production, and investment came in stronger-than-expected in July, with the country’s copper imports hitting a 14-month high and iron ore imports at a record level.

China is the main driver of global metals demand, accounting for two-fifths of global consumption. The shift in sentiment has triggered a rally in metals prices and mining shares in the past week, with copper prices, which had slid 20 per cent since February, rallying 8.7 per cent in the past fortnight.

Copper premiums are agreed in private deals between traders, meaning there is debate about the true level of the market and historical data are patchy.

However, traders said premiums in China were the highest they could remember, comparable only with a spike in early 2009 as the country’s purchases soared.

According to data from Macquarie, an investment bank specialising in natural resources, the premiums are the highest since at least 2000, when China accounted for only 12 per cent of global copper demand.

Although the strength in copper demand is not as striking as the stellar levels of 2009-2010, traders say it has combined with production problems at smelters and bottlenecks at warehouses to tighten the market significantly.

Inventories of copper at Shanghai’s port have almost halved since February, and exchange stocks at all three major global copper exchanges have fallen in the past two months.

Premiums have further been boosted by several technical factors. Queues to withdraw copper from LME warehouses in Malaysia have increased the value of available physical metal, while new regulations from Beijing clamping down on the use of copper to obtain credit has led some traders to boost imports.