Copper Inventory Pivot Surfaced Earlier Than in Previous Years, Fat Chance for Arbitrage

SHANGHAI, Mar 24 (SMM) - China copper inventory pivot surfaced earlier than in previous years post the Chinese New Year (CNY) holiday. And the spot-futures spread also changed from contango to backwardation amid low global inventory.

As of Monday March 21, SMM domestic copper inventory across major markets in China totalled 162,600 mt, down 9,900 mt from Friday March 18 and 44,300 mt from last Monday March 14, which marked the pivot for domestic copper inventory. The inventory as of this Monday added 63,900 mt from the pre-CNY holiday level of 98,700 mt.

In details, the inventory in Shanghai and Guangdong dropped 5,900 mt and 2,500 mt respectively to 100,200 mt and 45,300 mt over the recent weekend. While the inventory in bonded zone rose only 7,800 mt to 331,400 mt.

There are three reasons for the early presence of inventory pivot.

1. As a result of the Russia-Ukraine conflicts, overseas concerns about market supply as well as inflationary pressures greatly heightened LME copper, hence SHFE/LME copper price ratio stood low, meaning the import losses were huge, which hindered copper imports. In this case, some large smelters embarked on exports, and some even exported their cargos to LME warehouses.

2. With the recent outbreak of the pandemic in many places in China, the efficiency of shipments has been significantly reduced, with some sources forced to pile up in the factories. Although the downstream is also disturbed by the pandemic to some extent, and the consumption has turned weaker, the impact on the supply side is clearly greater than on the demand side. In addition, a domestic smelter in Shandong is under financial pressure, with substantial production cuts being the solution, aggravating supply concerns.

3. The cost efficiency of copper scrap has weakened significantly after Document No. 40 (new VAT policy) took effect on March 1, and most participants in the scrap market are wait-and-see, which shores up the consumption of refined copper and contributes to the falling copper inventory.

As such, frequent supply side issues on the back of historical low inventory strongly support the near-term bullish outlook. The futures market is also expected to re-stage the great backwardation structure seen in Q3 and Q4 in 2021.