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Effects from Scrap Copper Shortfalls
Domestic and overseas scrap copper cargo holders were holding back goods in April due to slumping copper prices. The resultant scrap copper shortfalls forced many large domestic copper smelters including Jiangxi Copper to suspend some production lines.
SMM believes it necessary for some copper smelters to suspend scrap copper production lines as margins of refined copper produced with scrap copper were low and since consumption was affected by slower China's economic growth.
Will Copper Price Reverses Declines?
Copper prices have remained in downward track after the Chinese New Year holiday, but rebounded in May. Does that mean copper price has reversed declines?
SMM believes copper prices still face downward risks. First, global economic recovery is still modest, and will hardly support copper price. Second, copper shortfalls reversed to surplus, and this will continue in the interim since the high demand season will end soon. Third, scrap copper supply will increase due to rising price. Fourth, the strengthening US dollar index will curb copper price. As such, SMM believes market players should be cautious towards this round of price bounces.
Copper Inventories Fall
China's domestic copper inventories have been falling recently. A most recent SMM survey shows that inventories in bonded zones of Shanghai have been decreasing from a high 750,000 mt, to 600,000 mt; SHFE copper inventories also dropped from 240,000 mt, to 200,000 mt. Stocks at processors and smelters remained largely unchanged at low levels.
SMM sources reported demand for copper did improve recently, especially when copper prices dropped to USD 7,000/mt and RMB 50,000/mt, bargain hunters rushed to the market, causing deliveries to grow sharply.
But the reason why inventories in bonded zones fell is more complicated. Some inventories in the bonded zone were released to domestic markets due to the improving SHFE/LME copper price ratio. Besides, some inventories were moved to LME warehouses due to subsidies. In addition, long-term contracts for imported copper decreased this year, a drop of 30%.
Financing Copper Risks Differ from Steel Traders' Risks
Market players remain vary of risks of copper imports for financing purpose given slumping copper prices. SMM believes China is reining in copper imports for financing purpose, but financing copper imports do not have risks of pledging as steel trade do.
Steel traders will suffer from bankruptcy once their collateral prices fall, whereas copper inventories in bonded zone stocked in overseas warehouses do not have such risks. Enterprises import copper by rules to ward off risks.
Risks for copper imports for financing purpose are mainly from arbitrage. SMM believes China curbing copper imports for financing purpose shows China is standardizing credit loan system, without hurting the net copper imports of 2 million mt/yr, which is needed in domestic production.
Copper imports for financing purpose supported copper price to maintain its high in 2012, while decreasing copper imports for financing purpose will pull copper price down.
How will the significantly fluctuating copper price affect copper traders? SMM believes the wide copper fluctuations will confront enterprises with risks.
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