Crazy Copper "Divert": From London to Shanghai

The global copper market has been on a dramatic shift over the past year, with a significant movement of copper from the London Metal Exchange (LME) to the Shanghai Futures Exchange (SHFE) and the Shanghai Free Trade Zone. This "diversion" of copper stocks has led to a sharp increase in domestic inventories, raising concerns about potential risks such as these stocks flowing back into the international market or being sold domestically. Analyst Gu Fengda from a leading financial institution told *First Financial Daily* that the trend of global copper inventory transfer has become increasingly evident since the second half of last year. With stricter regulations and investment banks exiting the LME warehousing business, LME copper stocks have been declining rapidly, with large volumes moving toward Asia, especially China, driven by high premiums and financing needs. This has resulted in a surge in refined copper imports, pushing up hidden domestic stock levels. Data shows that LME copper stocks dropped from 650,000 tons at the end of last year to 250,000 tons in March this year. Meanwhile, SHFE copper stocks have remained relatively stable around 160,000 tons, while the Shanghai Free Trade Zone saw copper stocks soar to around 700,000 tons, acting as a "shadow warehouse" for imported refined copper. Despite China's economic slowdown and weak real economy demand, copper imports have continued to rise. In February alone, China imported 380,000 tons of copper and copper materials, up 27.5% year-on-year, while refined copper imports reached 280,000 tons, a 29.94% increase. These figures contrast sharply with the declining industrial profits and manufacturing PMI data, indicating a disconnect between macroeconomic indicators and trade flows. UBS Securities analyst Lin Haoxiang noted that the depreciation of the Chinese yuan and falling domestic capital prices have widened price spreads, increasing the cost of copper financing. This has brought the market closer to an inflection point, with copper inventories from 2013 continuing to influence current conditions. As the world’s largest copper consumer, China’s demand has seen a significant drop since the global economic crisis. Developed countries have also experienced stagnation or even a decline in refined copper consumption. Current weak copper prices are largely due to concerns over China's economic growth and default risks. With weak domestic demand and tighter credit conditions in the banking sector, there is growing concern about whether the large amount of copper stored domestically will be sold locally or returned to the international market. Gu Fengda pointed out that returning copper to the LME market is difficult, given the stable supply and demand in Europe and the U.S., which lacks strong incentives for returns. Instead, China is expected to see increased smelting and export activity in the second quarter, acting as a buffer in the supply-demand balance. However, the pressure on domestic sales is rising. UBS believes that the ongoing depreciation of the yuan and falling domestic fund prices have made copper financing more expensive, potentially leading to the gradual outflow of copper stocks and increased supply pressure in the domestic market. Domestic copper consumption is also struggling to grow. According to Guoxin Research, the traditional peak season for copper demand in March and May is not looking promising, and consumption may fall short of expectations during this period. While some optimism remains around grid investments, analysts warn that ultra-high voltage (UHV) projects may actually limit copper usage. Many of these projects remain in the planning stage due to economic, security, and environmental concerns. Some market participants worry that the massive inflow of copper could lead to a situation similar to steel trade, with potential defaults if domestic demand remains weak. However, no major risk cases have emerged yet. Gu Fengda explained that **copper trading relies heavily on exchange rate differences and spreads, with strict hedging mechanisms that make it resilient to price fluctuations. Corporate qualifications and banking supervision are also relatively strong.** According to a report by Guoxin Securities, as China continues to liberalize its financial markets and interest rates, the shrinking spreads may limit copper's profit margins. Additionally, the possibility of the U.S. raising interest rates or accelerating copper use in 2015 could shorten the lifespan of copper-related financial products.

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