Copper and ore glut in China sparks concerns

Rising copper and record iron-ore stockpiles on the mainland, some of which were used as collateral to obtain financing by companies facing difficulties getting credit, pose a substantial risk if those inventories are suddenly dumped on the metals market.

Whether and when the stock would unwind to normal levels, and whether this would happen in an orderly manner, depended on Beijing's credit supply and regulatory policies, and whether fundamental demand would pick up as market participants hoped, analysts said.

"The inventory build-up has not reached crisis level, but if the credit tightening worsens, it may trigger traders to trade stocks for cash rapidly and cause some volatility," said Helen Lau, a senior metals and mining analyst at UOB Kay Hian.

"I'm not too worried at this point since Beijing may have some indication in next month's parliamentary meetings on credit policies, and March usually sees a seasonal pickup in metals demand, which may reduce the stock."

A few years ago, the backwardation or premium in spot copper flared out to as high as US$100 and this prompted delivery of up to 100,000 tonnes of copper in a single month at that time.

Despite slowing economic growth, the mainland's imports of copper products hit a record 536,000 tonnes in January, up 53 per cent year on year, customs data showed. The jump is unusually strong, notwithstanding State Grid Corp saying it planned to spend 13 per cent more on power grids this year. The regional power distribution monopoly is the country's largest copper consumer.

Inventory at warehouses monitored by the Shanghai Futures Exchange stood at 194,111 tonnes on February 21, up 59 per cent from January 10 and its highest level since May 10 last year, the exchange said.