China's mystery copper shoppers

The great China copper mystery has moved into a new phase. Late yesterday Australian time and overnight, China moved in and started heavily buying copper, pushing the price higher.

Then this morning, the Financial Times revealed that last month the China Non-Ferrous Metals Industry Association had disclosed that Chinese copper inventories stood at 1.9 million tonnes at the end of 2010, more than the US consumes in a year. The estimate is significantly higher than the 1.0m-1.5m tonnes range that foreign executives had assumed in the past.

The FT says that the new stock estimates "were presented at the last meeting of the ICSG, a group representing the governments of large copper-producing countries and consumers, in Lisbon at the end of September, according to several people who attended.”

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.

The FT did not link the higher than expected copper stockpiles to yesterday's report from Stratfor revealing how Chinese entrepreneurs and state enterprises had been able to finance copper stockpiles and then use the copper as security to fund their real estate speculation. This is how they circumvented the central government's credit clamps (China's red metal alert, October 12 and A tale of two Chinas, October 12).

Although Chinese statistics are unreliable, it's obviously likely that copper storing to fund real estate is a factor in the copper stocks being much larger than the market expected.

And then, in The Australian this morning, Michael Sainsbury reveals that the bottom has fallen out of the Beijing apartment market. That means that the entrepreneurs who have funded apartments via copper stocks would be in big trouble if both apartments and copper fell in value.

They will be very grateful for the Chinese buying. But remember while copper is sitting in warehouses funding real estate, China needs copper for its manufacturing and construction.

Nevertheless, at some point the copper in the warehouses will need to be used and the China stock figures indicate the tonnage is very large.