China is buying copper now \.:Macquarie Research

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China is buying copper now
 Following on from our Commodities Comment – Copper: China market
starting to turn, dated 11 May, we highlight in this week’s China Commodity
Call a number of new factors that make us even more confident that the
Chinese copper market is tightening. As a result of this information we are
taking our short-term trading sell call off of copper and highlight that our
current 2H11 and 1H12 price forecasts are more than 25% above current spot
prices. The prospect of sharp declines in copper stocks in global warehouses
in 2H11 and a pick-up of Chinese copper imports from mid-2011 are set to be
the catalyst for the next move higher.
 LME copper prices have fallen by ~10% since early-March 2011, when
Macquarie put on its short-term trading sell call on copper. However, we are
now starting to feel more comfortable about the copper price moving up, with
a gradual pick- up of Chinese copper fabricators’ utilization rates, solid order
books over the year to date and the end of consumer destocking.
 Our discussion with copper cable, rod and tube producers suggests that their
utilization rate has moved up significantly since early-April this year to ~90%+
in May, from ~60–70% only back in 1Q11. Order books year to date for
copper wire and cable producers have been growing at ~20–30% YoY for
larger producers and ~15–20% for the smaller players. Major copper tube
producers are also ramping up to full capacity rate at the moment in the face
of substantial growth in China’s home appliance industry.
 Tight liquidity supply from the central government forced copper fabricators to
destock their working capital from the beginning of the year. However, they
were forced to come back to the spot market coming to the end of their
destocking cycle from early-April. As a result, reported (SHFE) and
unreported copper stocks (bonded warehouse material) in China came off
heavily over the past six weeks, with SHFE reporting copper stocks down by
40%, or 72kt, from the peak back in end-March this year to 105kt (as of last
Friday). Bonded warehouse copper inventories have fallen by ~100–150kt to
500kt at the time of writing this report. Lower Chinese imports also contributed
to the decline in stocks over the period.
 Scrap is being de-stocked in China, and discounts are coming in sharply. The
price discount of scrap copper to refined metal narrowed significantly this year
from the peak of Rmb4,500/t ($692/t exclude VAT) back to end-2010 level of
Rmb750/t ($115/t excluding VAT). This reflects strong scrap demand vs
supply and is bullish for the refined copper market, as it suggests the
incentive to use more scrap/scrap availability is waning.
 The major driver of the very recent $300–400/t pick-up in prices from their
intraday lows of ~$8,500/t appears to be the long-waited buying from China to
support the physical copper market.