China coming a c(r)opperDavid McKayPosted: Sun, 18 Dec...

China coming a c(r)opper
David McKay
Posted: Sun, 18 Dec 2005
[miningmx.com] -- DECEMBER 21 is an important date for the copper market as it represents the futures close out, the last of the year, and the day on which China’s State Reserve Bureau (SRB) must deliver on a large copper trading position. It may or may not default depending on whom you’re speaking to.


Led by the now infamous Liu Qibing, a trader who worked at the SRB in Beijing, the Chinese have to find an estimated 120,000 to 200,000 tons of copper but given backwardation in the market – where the spot price of copper is more than the forward rate – buying the copper is diffcult.

Liu agreed to sell copper he didn't own on the London Metal Exchange (LME), betting a drop in prices would let him buy it back more cheaply. Instead, copper prices rose to a record. Liu is now under house arrest, according to media reports.

Since then the SRB has been attempting to auction copper in order to drive its price lower. About 20,000 tons were auctioned on December 7 building on the 46,000 tons in three previous auctions during November. The attempts were unsuccessful.

As a result, copper prices are being “artificially inflated”, according to Numis Securities, a British stockbroker. The outcome is that at the time of writing, copper prices are at an all-time high of $4.460/t ($2.02/lb) for three months and possibly $200/t for spot (backwardation).

“It is clearly time to settle, roll-over or deliver with many traders believing that it will be impossible for the SRB to physically deliver LME grade copper in the contracted warehouses by the due delivery dates,” said John Meyer in a note by Numis Securities.
It is clearly time to settle, roll-over or deliverEven without this trading phenomena, which is evocative of ‘top-of-the-market’ excesses, the outlook for copper remains extraordinarily good partly owing to better conditions for longer in China.

“We have raised our copper price forecast to $1.60/lb ($3.526/t) from $1.45/lb ($3.196/t) in 2006 factoring stronger copper demand growth rates from China and slightly slower supply due to new government measures to slow down growth of the copper smelting in the medium term,” said Goldman Sachs analyst Alberto Arias.

One risk to the copper price is that semi-fabricators of the metal will find other metals as a cheaper substitute. “Copper manufacturers are reducing copper weight on certain products (using thinner tubes and connector strips) which may structurally hurt copper demand in the longer term,” said Arias.

But a second wave of industrial growth is expected from China as many of the inner provinces continue the activity of the larger centres by convering a large proportion of their population to urban areas.