China surprised the copper market in October, with data showing that its imports of unwrought copper and copper products in September increased 22% month on- month from August, to 399,052t. July and August had seen import volumes decline, month by month, and the market consensus was that September would see the third consecutive monthly slide.

The fact that import volumes reversed indicates clearly that Chinese demand is still healthy, especially considering the high copper price and negative differential between Shanghai and LME copper price (including VAT). The copper price reacted positively to the news but was capped by further gains in LME warehouse stocks, which suggests that demand outside of China is still very weak.

LME warehouse stocks have now risen by 39% since their low in mid-July, to more than 357,000t as of 19th October. In contrast Shanghai stocks have dropped to 100,217t from 104,248t in mid- September. We do not expect to see an appreciable pick-up in OECD copper demand in Q4 2009, and therefore Chinese demand will be crucial in determining price strength in the short-term.

We estimate an apparent copper surplus of nearly 300,000t in 2009 and perhaps half that in 2010, as demand conditions improve and copper supply is hit by mine-supply disruptions. It is a fine balancing act, one where China's amassed off-market copper stocks - probably some 1 Mt - will have the final word.

Copper Outlook

Whether the larger than expected Chinese imports will kick-start another run up in the copper price is unclear, but what they do imply - unless its import volumes collapse - is a price floor of above $5,500/t until OECD recovery gets underway. We do not see this happening until 1H 2010, so producer discipline will be critical in ensuring that the surplus does not increase further. Price behaviors since August has been range-bound between $5,800/t-$6,500/t, and has been capped by rising LME inventories, slack OECD demand, and supported by Chinese demand and the readiness of speculative investment to step in when a price weakness is perceived. We see this as the big-picture dynamic for the rest of this year. Short-term LME three-month price: $5,750/t-$6,500/t.

Copper News

Oct 13th: Chile's Escondido averted a strike, after workers accepted a wage offer from BHP Billiton. The reverse happened at BHP's Spence mine in Chile, where workers opted to strike. Spence produced 164,671t of copper in 2008.

Oct 9th: The International Copper Study Group (ICSG) forecast the refined copper market will be in surplus of about 370,000t in 2009, with weak demand eclipsing a decline in production. The ICSG expects the surplus to rise to around 540,000t in 2010.

Oct 7th: BHP Billiton Olympic Dam copper, gold and uranium mine in Australia shut down an automated ore haulage system due to mechanical failure.

Courtesy: Fortis Metals Monthly

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