LME copper inventories at 10-year high; Level is the highest since China’s industrialisation was in its infancy

March 21, 2013 8:02 pm

LME copper inventories at 10-year high

By Jack Farchy in London

Copper inventories on the London Metal Exchange have risen to their highest level since 2003, in the latest sign of the copper market’s shift into oversupply.

LME copper stocks have risen 165 per cent since October, amid an increase global mine production and slower purchases from China, which has seen a rapid build-up of copper stocks in recent years.

On Thursday stocks on the LME rose 6,625 tonnes to 557,450 – the highest since October 2003, when the commodities supercycle driven by China’s industrialisation was still in its infancy.

Although LME stocks only represent one chunk of global inventories, they are closely watched by traders and analysts as an indication of the amount of surplus metal that is readily available to deliver into the market.

Benchmark copper prices for delivery in three months have slid 9 per cent since early February, and on Thursday dropped 0.4 per cent to $7,587 a tonne.

The rise in inventories has helped to fuel investors’ fears that the era of high copper prices and hefty margins for copper miners is coming to an end.

“If evidence is needed that the copper market is indeed much weaker now, one has to look no further than the recent surge in exchange stocks,” said Robin Bhar, metals analyst at Société Générale.

While miners are beginning to respond to a decade of high prices by lifting output significantly, Chinese copper imports – the biggest driver of the market in recent years – have slowed. Chinese refined copper imports in February were 11.6 per cent lower than in January, although that was in part thanks to the lunar new year holiday.

“With China slowing and rebalancing away from infrastructure spending, combined with increasing mine supply and substitution, copper is likely to flip into a supply surplus this year, lasting several years,” Mr Bhar said.

The bearish consensus is reflected in investor positioning. According to Commodity Futures Trading Commission data, investors have amassed the highest level of “short positions”, or bearish bets, on a net basis in six months.

Kevin Norrish, senior commodities analyst at Barclays, said: “Given how weak fundamentals appear at present with expanding supply contributing to surpluses and rising stocks, we think that rallies will fail to maintain momentum.”

Others, however, note that the falling price of copper on the LME has made it profitable to buy copper on the exchange and import it to China for the first time since 2011.

Leon Westgate, base metals analyst at Standard Bank, said that if this arbitrage remained open on a sustained basis, “the physical market will tighten up much more quickly than people anticipate” He added: “The ingredients are there for quite a sharp tightening.”