Thursday, October 13, 2011

Chinese Copper Inventories Revealed To Be Double Estimated

In a piece of news that can not be taken well by students of Dr. Copper, the FT reveals for the first time that China's estimated copper inventories, based on numbers from the China Non-Ferrous Metals Industry Association, were 1.9 million tonnes at the end of 2010 which is almost double the lower end of the consensus estimate of 1.0-1.5 MM tonnes (and, as the FT points out, "more than the US consumes in a year). So while copper is doing its high beta thing on the nth short squeeze day in stocks, the smart money is starting to bail for very obvious reasons. And if the reasons are not obvious, this means that "The estimates, which were announced at a recent meeting of the International Copper Study Group but have not been made public, imply that real Chinese copper demand may have been lower than thought in recent years." In other words, and to all who are still confused by why Zero Hedge jokes at each and every iteration of economic growth driven by "inventory stockpiling", this is nothing other than trying to do at the national level, what Goldman and JPM do at the LME level each and every day: hoard and sell, only in China's case it is more hoard and forget. Alas, when China itself is the only real marginal buyer (not to mention that millions of domestic businesses operate using Letters of Credit backed by copper), things get very, very ugly, and explains why China has been so secretive about this number.

From FT:

The CNIA estimated that Chinese copper stocks, not including those kept at Shanghai Futures Exchange warehouses, stood at 1.768m tonnes at the end of 2010, up from 1.218m in 2009 and 282,000 in 2008. SHFE inventories were 132,000 tonnes in 2010, putting China’s total stocks at 1.9m tonnes.

Other than exchange stocks, copper is held as working inventory by China’s manufacturing sector as well as by merchants, investors and the State Reserve Bureau, Beijing’s stockpiling agency. However, analysts, investors and traders are sceptical, noting that the world’s largest copper importer and consumer has an interest in inflating the size of its stockpiles, which could push prices down. The CNIA declined to comment.

That loud whooshing sound is long copper PMs sucking in air as they scramble to find the proper spin for this shock. Such as this one:

“Whatever the Chinese say that stocks are, in the end they still need copper,” said George Cheveley, metals and mining portfolio manager at Investec Asset Management.

Yes they will. And they will use the millions of tonnes they have in storage, not buy in the open market. Of course, this means that China will continue to buy US Treasurys and not diversify entirely to commodities. The opportunity costs of continued copper demand, however, is the difference between the 10 Year at 2% and 12%...

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