Copper – near-term upside looks difficult  Macquarie Research,

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Copper – near-term upside looks
difficult
 Following channel checks with our contacts and a review of the recent data,
we update our near-term view on copper. We argue that the Chinese are not
yet ready to restock, but a lack of inventory will keep them in the market,
resulting in range-bound copper prices.
1H11 copper demand was stronger than it appeared
 Chinese refined copper demand (production plus net imports, adjusted for stock
change in reported warehouses) was down by ~7% YoY for the first seven
months of 2011, reflecting destocking and an increase in scrap consumption.
 However we believe the real consumption of copper units (including scrap)
was much better than the apparent demand data suggests, growing by 7%
YoY over 1H11. This view is based on the strong output of copper-containing
finished goods like air conditioners, electric power cable and sustained
strength in Chinese construction activity.
This could reverse in 2H11
 Since early August, our channel checks suggest increasing concern from
Chinese traders and consumers about the macro picture. Utilisation rates at
fabricators are falling and their appetite for holding inventory has not
recovered, given tight credit and high prices.
 We see a situation where the lack of inventory following the 1H destock means
the Chinese have to come back to market to buy material (meaning apparent
consumption would rise) for ticking over, even if real consumption softens
sequentially. In our view, this will result in range-bound prices for copper.
 The challenge now for the copper price is whether the Chinese are at critically
low levels of inventory already or if they can stay on the sidelines for a little
while longer before being forced back into the market. We believe they can wait.
Iron ore – a little less urgent but still tight
 The latest data on iron ore inventory held by 50 smaller mills shows that the
recent round of buying activity has pushed volumes up to just over 31 days
of use by the end of August. When mills last built inventory to this level back
in May, they subsequently pulled away from the market, allowing prices to
drift down $13/t until inventory got back to what seems to be a critical level
of 28 days.
 As such, it does not seem that the next move for iron ore prices has to be up
– mills could choose to allow inventory to run down a little from the current
levels, although we would stress that this is unlikely to last more than a few
weeks (unlike copper, the bulk of the iron ore inventory buffer was worked
through by the end of March).