The global copper market has seen a dramatic shift over the past year, with a growing trend of moving copper from the London Metal Exchange (LME) to the Shanghai Futures Exchange (SHFE) and the Shanghai Free Trade Zone. This "diversion" has led to a sharp rise in domestic copper inventories, raising concerns about potential returns to the international market or increased local sales.
According to Guo Fengda, an analyst at a leading financial institution, the movement of copper has become increasingly prominent since the second half of last year. With stricter regulations and investment banks pulling out of LME warehousing, copper stocks have been flowing rapidly toward Asia. China's high copper premiums and strong financing demand have further fueled this trend, driving up hidden domestic stock levels.
Data shows that LME copper stocks dropped from 650,000 tons at the end of last year to just 250,000 tons by March this year. Meanwhile, SHFE copper stocks have remained relatively stable around 160,000 tons, but the Shanghai Free Trade Zone has seen a surge, reaching nearly 700,000 tons. This has turned it into a "shadow warehouse" for imported refined copper.
Despite China’s economic slowdown, which has not supported large-scale copper imports, the country’s copper imports have continued to rise. In February alone, China imported 380,000 tons of copper and copper materials—an increase of 27.5% year-on-year. Refining copper imports also surged by 29.94%, while exports fell sharply by 59.44%.
Analysts note that the depreciation of the Chinese yuan and falling domestic capital prices have widened the price gap between domestic and international markets, increasing the cost of copper held in China. This could push copper inventories toward a turning point, as highlighted by UBS Securities’ Lin Haoxiang.
China remains the world’s largest copper consumer, but recent reports suggest that demand has slowed due to weak economic growth and reduced consumption in developed countries. Market concerns about China’s economic outlook and default risks are contributing to the current weakness in copper prices.
With weak domestic demand and tighter credit conditions, the risk of copper inventories being sold locally or returning to the international market is rising. However, analysts believe that returning copper to the LME is unlikely, given stable supply and demand in Europe and the U.S., and the lack of incentives for such moves.
Guo Fengda predicts that the second quarter will see increased smelting and export of copper, acting as a buffer for supply and demand imbalances. The bonded area is expected to play a key role in balancing domestic and international copper inventories.
As the return of copper becomes difficult, domestic sales pressure is likely to grow. Analysts warn that the continued depreciation of the yuan and falling fund prices may lead to the gradual outflow of copper stocks, adding more supply to the Chinese market.
Domestic copper consumption also faces challenges, with traditional peak seasons in March and May showing little optimism. Consumption growth during these periods may fall short of expectations.
While some hope for increased grid investment to boost copper demand, others point out that ultra-high voltage (UHV) projects have limited copper usage. Many projects remain in the planning stage due to economic, security, and environmental concerns.
There are also worries that if domestic demand fails to absorb the large volume of copper, it could shift toward the steel trade, potentially leading to defaults. However, no major cases have emerged yet.
Guo Fengda notes that **copper trading relies on cheap financing through exchange spreads and has a strict hedging mechanism, making it resilient to price fluctuations. Corporate qualifications and banking oversight are also relatively strong.
According to Guoxin Securities, as China continues to liberalize its financial system, the narrowing of domestic spreads will limit copper’s profit margins. Meanwhile, the U.S. may raise interest rates in 2015, reducing the lifespan of certain copper-linked financial products.
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