Chinese copper stocks approaching previous peak

SHFE copper stocks have risen a further ~14k in the past week after a 30k increase the week before. Bonded warehouse stocks have also risen markedly over the past few months and on most counts are close to similar levels seen around this time last year.

The overall level of copper inventory is still lower than a year ago, with LME inventories still dropping and COMEX inventories remaining low.  Copper spreads also remain tight with backwardation between cash and 3 month prices.

What is important to price direction from here is that we see a decent lift inseasonal demand heading into mid year.  If not, copper prices will come under more significant pressure than bouncing around in the trading band seen over the last few months.

A rise in SHFE copper inventories is not too be unexpected this time of year as consumption starts to build into the seasonally stronger months ahead.  There is also talk of more copper being used for financing deals, although this will be in bonded warehouses rather than in SHFE registered warehouses.

So the gains so far aren't really too troublesome.  But if SHFE stocks remain on its current trajectory for the next couple of weeks, then that story is likely to change.

Whether stocks continue to build will largely depend on how strong consumption will pick up in the coming months. So far leading indicators haven't been that encouraging.  The China flash PMI fell further in Feb to be at a low level for this time of year.

Coal burn was also weaker YoY in the first 10 days of February, although this maybe partially affected by the timing of Chinese New Year.

What hasn't been affected by holidays is steel production, which jumped strongly from January levels, although is only up a modest 3.9%YoY.

Consumption, however, looks to be weaker than this given a large than usual increase in inventories at steel mills and traders.

So from the early read it continues to look like activity is slower in China.  For copper this is important as although inventories remain low, supply growth should continue to be strong.

Another key difference between this year and last is the trajectory and level of interest rates.  Overnight SHIBOR has actually crashed in the last few days and this has bought down lending rates for 1-2 weeks.  Interbank rates at a month or longer still remain high. These rates affect the ability of shadow banking products access to credit.

So it still seems that policy makers have their foot on the brakes when it comes to credit availability, which is only likely to slow growth further.