Chinese copper cathode demand up on raw material tightness: banks

 

 

Chinese trade data released Monday showed that refined copper imports rose 7% in October to from the previous month and 74% year-over-year to 295,000 mt, the highest for the year and the highest since April 2010, analysts with UK retail and investment bank Barclays said.

 

 

"Whilst some of this increase may be due to financing as some market participants are speculating, we believe the strength in imports largely reflects solid demand for cathode against a backdrop of tight domestic supply," Barclays analysts said.

 

 

Chinese refined smelter production has been constrained by tightening global concentrate supplies due to the effects of several mine disruptions on the market.

 

 

In particular, the ongoing strike at the 510,000 mt/year Grasberg mine in Indonesia, which has fully shuttered the mine, "has made a big dent in recent concentrate availability and has yet to be resolved," the Barclays analysts noted.

 

 

Copper concentrate imports totaled 517,000 mt in October, the weakest since July, compared with 563,000 mt in September. "We would not be surprised to see this number decline further into the year-end given supply disruptions," the analysts added.

 

 

The tightening of concentrate supply in China is reflected in the rapid decline in spot treatment and refining charges, which now stand at 7.7 cents/lb from 20 cents/lb just a few months ago, Barclays added.

 

 

Falling spot TC/RCs have been exacerbated by tightness in scrap supply due to merchants holding back on sales because of low prices, as well as regulatory clampdowns in the Guangdong province, which have slowed the pace of scrap entering the country, analysts with Barclays and Bank of America Merrill Lynch said, a sentiment echoed by several scrap sources in the US.

 

 

Scrap imports in October totaled 377,000 mt compared with 418,000 mt in September.

 

 

Tightening supplies of domestic raw materials in China has constrained refined copper production, resulting in smelter utilization rates falling to the lowest level all year, Barclays analysts said.

 

 

The tightening of domestic raw materials has had two effects: Chinese brokers and consumers are shifting their buying toward refined copper and away from concentrate, while fabricators substitute refined copper cathode for scrap.

 

 

"There is strong anecdotal evidence that particularly producers of semi-finished products increasingly resort to cathode has less scrap is available," BofA Merrill Lynch analysts said in a separate report.

 

 

As a result, apparent Chinese consumption has jumped and is now exceeding the previous record high. BofA Merrill Lynch analysts expect the global copper market to record at 530,000 mt deficit this year and a deficit of 170,000 mt in 2012.

 

 

"Nevertheless, it is worth noting that we have marginally more copper mine supply emerging through next year and in 2013, which would suggest an easing of the concentrates and potentially the refined market," BofA Merrell Lynch analysts said. "This could then also be accompanied by somewhat higher treatment charges."

 

 

Current spot demand for refined copper in China has already begun to soften as fabricators buy on a hand-to-mouth basis due to concerns about weakening export demand and the potential for contagion to spread from Europe, Barclays analysts noted.