In the near term, it seems likely that the market for refined metal will remain tight given the seasonal uplift in activity in China and the low levels of ex-China inventory.
This should see the backwardation in prices widen and perhaps that is a better play than flat prices, given the poor outlook for key sectors once we head into the summer manufacturing lull.
Looking at the chart on the left, rising premiums have historically suggested price declines are being caught by stronger Chinese interest. Prices haven't fallen particularly sharply this time around, but there are now reports of the SRB looking to add to strategic stockpiles at these levels.
A few weeks ago, the fear would be that this metal would be moved into bonded warehouses to take advantage of the positive arb between LME and SHFE warehouses. But with premiums rising and bonded warehouse inventory falling, it seems likely that strong consumption is behind these falls.
Rising premiums and falling inventory suggests that Chinese consumption is has strengthened in the recent past. Some of this is seasonal, its probably also in part to traders being less spooked about financing demand.
I would still be concerned that activity could be weak in key sectors in the coming quarters. Monetary indicators have been poor, while the outlook for housing also looks increasingly bad.
So it maybe a similar situation to what we saw at the end of 2013. During that period flat prices moved higher as it was clear that inventory was being consumed faster than expected. But the rally didn't last too long as macro indicators turned out to be disappointing.
Cash - 3m spreads, however did widen in backwardation right up until the sharp fall in March. So for me a wider backwardation in copper spreads is probably the better way to play the signs of improving physical demand in China.
