A rare burst of Chinese exports has deflated bull spirits in the copper market, with funds dumping long positions and prices down by 16% from the record highs seen in May.
The world’s largest buyer of copper shipped out an unprecedented 158,000 metric tons of refined metal in June. First-half exports of 302,000 tons were already higher than any full calendar year since 2019.
This break of normal trade patterns has punctured a bull narrative of constrained supply and cyclical demand recovery.
Weak Chinese purchasing managers indices show that activity in the country’s manufacturing sector sank to a five-month low in July, reinforcing Doctor Copper’s gloomy message.
Yet demand weakness is only part of the story.
Fast-rising domestic production and a flood of African imports have saturated the local market. And then a ferocious squeeze on the CME contract in May opened an equally unusual export arbitrage window for that excess to flow out.
TOO MUCH COPPER
China produced 5.9 million tons of refined copper in the first half of the year, according to local data provider Shanghai Metal Market. That represented year-on-year growth of 6.5%, equivalent to an extra 359,100 tons.
The robust growth rate runs counter to expectations that domestic production would fall after the country’s smelters committed in March to curtail output due to tight raw materials supply.
It’s true that many smelters have taken maintenance downtime in recent months, but the cumulative impact has simply been a moderation of the supercharged rate of expansion.
Rising smelter output has coincided with a period of high refined copper imports.
Although the export burst has significantly reduced China’s net call on the international market, the country’s imports have remained strong. Volume rose by 16% year-on-year to 1.9 million tons in the first six months of 2024.
China also imported significantly more scrap copper, volume increasing by 18% year-on-year to 1.2 million tons in January-June.
Chinese demand would have had to be super-strong to absorb the simultaneous combination of more domestic and more import supply. Clearly, it wasn’t strong enough.
THE RISE OF THE CONGO
The core driver of China’s higher metal imports has been the Democratic Republic of Congo (DRC). The country last year overtook Peru as the world’s second-largest copper producer and shipped more metal to China than top producer Chile.
Trade flows between the two countries continue to accelerate, with China’s imports jumping by 91% year-on-year to 698,000 tons in January-June. The June tally of 150,000 tons was a new monthly record.
Given China’s dominant role in DRC’s copper-cobalt mining sector, trade flows between the two countries are unsurprising.
However, it’s also the case that there is no other equivalent market for Congolese copper, including the world’s big three exchanges.
The London Metal Exchange (LME) currently has only one Congolese brand on its good delivery list - “SCM”, produced by La Sino-Congolaise Des Mines with annual capacity of 82,400 tons.
DRC copper is not deliverable against either the CME or Shanghai Futures Exchange (ShFE) contracts.
With Chinese demand insufficiently strong to absorb surging imports, Congolese metal has washed around the domestic market, dragging down both premiums and prices to the detriment of local smelters.
(NOT) GOOD DELIVERY
CME’s limited good-delivery list of copper brands is one reason the U.S. contract got squeezed so badly in the second quarter.
Stocks fell to just 8,117 tons at the start of July, as shorts found their capacity for physical delivery largely confined to U.S., Canadian or Latin American brands.
Inventory has since rebuilt to 23,620 tons, but it has been a painfully slow process.
When the squeeze was at its most acute in May, CME copper was trading at a premium of $1,100 per ton over LME copper. Both were priced much higher than the well-supplied Shanghai market.
The net result was a rare export window for Chinese producers to ship surplus metal.
China shipped 16,000 tons of refined copper to the United States in June, which is an extremely unusual phenomenon. But the metal can’t be delivered against CME shorts since the exchange has no Chinese brands on its good delivery list.
However, Chinese metal can be delivered to the LME, which currently accepts 22 Chinese brands of copper.
Most of what China has exported has headed to South Korea and Taiwan, both LME good-delivery locations.
LME stocks included just 400 tons of Chinese copper in February. That mushroomed to 121,700 tons at the end of June, with Chinese metal accounting for almost 54% of total registered inventory.
Were there seamless physical arbitrage between the CME, LME and ShFE, China could have shipped directly to the CME, or diverted excess Congolese copper to the United States.
The reality has been a tortuous reconciliation of regional imbalances. Chinese surplus is moving to the West but largely via LME warehouses in Asia.
The LME at least is emerging as a potential market of last resort for Congolese copper. It received its first 500 tons of “SCM” brand metal in June. Other Congolese producers, including China’s CMOC, are seeking to list their brands.
The CME good-delivery list, by contrast, accounts for a shrinking share of global production.
Analysts at BNP Paribas calculate the volume of deliverable copper has shrunk from seven million tons in 2010 to around four million.
The CME has the disadvantage of operating only domestic good-delivery points, leaving it exposed to broader U.S. trade policy against China, Russia and other countries deemed problematic.
But while physical delivery options remain constricted, a repeat of the May squeeze is not inconceivable.
OPTICAL ILLUSION
Reading Chinese copper exports as a simple signal of weak demand misses the impact of the extraordinary squeeze on the CME and the divergence in good-delivery options on the three exchanges.
Chinese copper demand may be slower than expected but it hasn’t fallen off a cliff. State research house Antaike is forecasting 2.5% growth in usage this year.
China’s export burst, meanwhile, appears to be winding down, with outbound shipments falling to 70,000 tons in July.
ShFE stocks have been sliding since the start of July, and at 262,206 tons are now 75,000 tons below the June peak.
The Yangshan import premium, which fell into negative territory in May, has risen to $53 per ton.
It may not be too long before some of what China has exported turns around and heads home.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.