TOKYO -- Record Shanghai copper inventories fed by speculative imports are obscuring the level of true demand in China, making the metal less reliable as an economic indicator.
Copper on the Shanghai Futures Exchange ended Friday at 37,620 yuan ($5,774) per ton, down slightly from Thursday and 5% below a recent high hit in early March. Data released after trading showed on-warrant copper inventories at 177,000 tons, marking an 11th straight weekly increase. That level is double inventories during March 2015.
"Arbitrage trading betting on a weakening of the yuan" is responsible for ballooning copper inventories, said Takayuki Honma of Sumitomo Corp. Global Research.
Investors predicting that the yuan will lose value are buying Shanghai copper in anticipation that yuan-denominated prices will rise. That demand has at times boosted the metal's Shanghai price above that on the London Metal Exchange. Shanghai copper traded at the equivalent of around $4,570 per ton in late January, compared with $4,440 in London. Copper traders began procuring the metal from warehouses in London and exporting it to China, keeping it in Shanghai for delivery, Barclays reports.
LME inventories have thus fallen 40% since the start of the year. China's copper imports, meanwhile, surged more than 20% on the year to 860,000 tons in January and February. That metal has not been consumed, instead becoming part of swelling inventories.
The trouble is that piled-up inventories will eventually bring down Shanghai copper's price below that in London and then drag the LME price with it. "A weakening yuan weighs on China's buying power, meaning increased copper imports won't continue for long," said Tomomichi Akuta of Mitsubishi UFJ Research and Consulting.
No matter how much copper is moved from London to China, the LME price of copper will face downward pressure. The price reached a four-month high of $5,131 per ton in mid-March but has since fallen 4%.
Investment banks in Singapore have formed specialized teams to draw up various schemes for copper market speculation, according to a source at a financial institution there. Exploiting the U.S.-China interest rate gap was a common strategy several years ago. But more traders have turned their eyes toward the gap between the yuan's onshore and offshore value since last year, the source said. While fear of detection by Beijing has led to a temporary lull, the practice could pick up again at any time.
International prices of energy commodities and nonferrous metals are frequently used as indicators of economic activity. "Dr. Copper" is seen as particularly sensitive to global economic health. But speculative trading is obscuring real demand for the metal in China, causing changes in import and inventory figures that are divorced from reality. As yuan market volatility spreads to copper, the picture of the Chinese economy grows ever hazier.