Jul 18, 2012 (Dow Jones) -- A recent rise in Shanghai Futures Exchange copper inventories signals sustained weakness in Chinese domestic copper demand at a time of rising smelter production, industry participants said.
The increase in inventories underscores the weakness of the Chinese copper market, which has been lackluster in recent months amid sluggish domestic manufacturing demand. A prolonged build-up in Chinese inventories could weigh on London Metal Exchange copper prices as investors express concerns about market fundamentals in the second half of the year.
SHFE inventories rose by a net 5,691 metric tons on week to 160,928 tons July 13, a 15.4% increase since June 29, exchange data showed.
"A third consecutive weekly gain in Shanghai copper stockpiles signaled that domestic demand conditions could be softening," ANZ analysts said in a report this week.
Copper demand has picked up slightly since the start of July, but remains muted due to low fabrication rates, Asian traders said. While demand remains slow, production has increased in China in the last month, data released Tuesday showed.
China's copper output in June rose 11.6% from a year earlier to 518,000 tons, the National Bureau of Statistics said.
"This increase follows a normal seasonal pattern and makes up for a weaker-than-normal seasonal production profile in both May and April," Standard Bank analyst Leon Westgate said in a report Tuesday.
The increase in SHFE stocks could be a result of suppliers delivering metal onto the exchange that would otherwise have been sold to domestic customers on a spot basis, analysts said.
"I view the SHFE inflows as being a result of higher domestic production...demand is weak, so it's not that surprising that there's domestic metal that can't find a home," a London-based analyst said.
Lower China copper imports in June also point to tepid demand, traders said.
China's copper, copper alloy and semifinished products imports in June fell 17.5% from May to 346,223 tons, the General Administration of Customs said July 10. June imports were 23.6% higher from a year earlier.
Shanghai copper premiums over LME prices--an indicator of supply and demand--were around $60-$80/ton in early July, up $10-$20 from mid-June but still sharply lower than around $120/ton in January.
Three-month copper was last trading around $7,650/ton on the LME, up 0.8% from its previous settlement and 0.5% lower since the start of July.