Copper under pressure but analysts see support from strategic buying
Although mainland imports are slowing amid tighter credit, prices are seen benefiting from strategic reserve purchases and power grid plans
While the worst fallout from the Qingdao metal-backed financing scandal may have passed, mainland copper imports are slowing, with volumes shifting from small traders to larger ones as banks become more cautious.
Still, analysts said, copper prices would be supported by strategic reserve buying and demand spurred by power grid construction.
"Copper imports will likely be under pressure in the second half of the year, partly because of small traders going out of business amid tightened lending," said JP Morgan Asia-Pacific head of basic materials research Daniel Kang, adding that their volumes would be taken over by bigger rivals.
"The copper price will find good support from stockpiling by the Strategic Reserve Bureau and infrastructure demand at levels below US$7,000 a tonne ... China is structurally short of the metal."
Refined copper imports fell for a second month last month to a 13-month low amid an investigation into metals back-financing irregularities, while exports jumped 41 per cent from May, Bloomberg reported on Monday.
Copper stocks monitored by the London Metal Exchange in South Korea, the closest delivery point to Shanghai, surged by 12,000 tonnes - a sixfold jump - from June 19, and stocks at mainland bonded warehouses fell by 100,000 tonnes from June 11, it added.
Matthew Wonnacott, copper demand and markets consultant at London-based consultancy CRU, attributed lower imports to slower letter of credit issuance by mainland and foreign banks for metal imports because they were worried about the security of collateral.
The Qingdao scandal broke early last month when the authorities announced they were investigating allegations that the same stocks of copper, alumina and aluminium had been illicitly pledged multiple times to raise loans from various lenders.
"Uncertainty over how the financing deals will be done in China will evolve and may continue to affect sentiment," analysts at Bank of America Merrill Lynch said in a report.
"Some tonnages may be released into the market as more financing deals could yet be unwound ... but tonnages involved in Qingdao are not big enough to break the copper market."
Tian Gang-feng, an analyst at Shanghai-based Haitong Futures, said that the unwinding of copper futures by importers could also support copper prices. Futures contracts allowed them to hedge downside price risk.
Alex Poon, the vice-president of commodities brokerage ADMIS's Hong Kong unit, said copper futures prices had plunged at the onset of the Qingdao scandal, as market participants feared all "finance games" related to copper would come to an end. Prices later rebounded on the back of favourable mainland economic data, but concerns about ample new supply lingered.
Wonnacott said the copper market would also be clouded by uncertain demand, after a marked fall in new housing construction and poor property sales in the past few months, but that would be offset by strong demand for use in power grid construction.
Analysts say price gains will be limited by supply from a slew of new mining projects in the next 18 months, but they are projecting a rally in 2016 or 2017 due to tighter supply and high demand growth on the mainland, which Commerzbank commodities analyst Daniel Briesemann projected to reach 5.5 per cent this year.
The three-month copper futures contract gained a total of 0.9 per cent in the past two days, fetching US$7,050 a tonne in early trade on the London Metal Exchange yesterday.
Some 36 per cent of mainland smelters expect copper prices to hold steady in the near term, according to a survey by industry portal Shanghai Metals Market.
Bank of America Merrill Lynch is tipping an average price of US$8,250 a tonne in 2017, while CLSA expects it to reach US$7,941 in 2016.