Is copper at $7,000 a bargain for China?

June 5, 2013

By Jack Farchy at Financial Times in London

The State Reserves Bureau’s intentions are the talk of the market

What is China’s State Reserves Bureau up to? China’s secretive and powerful stockpiling agency had been making inquiries about buying the red metal, having earlier this year purchased nickel on the international market for the first time since the financial crisis.

At first glance, the situation now may be an inopportune time to buy copper. Yes, prices have fallen about a third from 2011’s record high of $10,190 a tonne, but they are still double the lows of 2008 and more than double the levels of pre-2004.

It is notable that the SRB started making inquiries about copper, according to my sources, just as it dropped below $7,000 about a month ago. The agency was also sniffing around the copper market in the autumn of 2011 when prices fell to a low of $6,635, traders said, although it was not clear that it actually made any purchases.

If it is the case that the SRB sees prices of $6,800-$7,000 as good value, the implications for the market are significant. The talk at the moment is that the SRB may wish to buy about 200,000-300,000 tonnes – enough to move prices significantly but probably not a game-changer in the face of a wave of new mine production. But the Chinese government’s pockets are deep and the knowledge of SRB interest at a particular price level could easily set a floor for the market.

Such a price level need not seem unreasonable. First, given the appreciation of the Chinese currency against the dollar, the recent price fall took LME copper in renminbi terms to the same level as in early 2006. Moreover, as Max Layton at Goldman Sachs points out, once the inflation in production costs over the past decade is taken into account, current prices look much closer to the previous periods of reported SRB buying, in 2002 and 2008-09.

Nonetheless, some caution is warranted before getting carried away.

First, to the best of my knowledge, the SRB has not bought copper in significant quantities during the current price dip. Some traders believe the agency may have already picked up a few tens of thousands of tonnes, but it does not appear to have bought in the scale the market is talking about – yet.

Second, the SRB is not stupid. As Mr Layton also notes, there is a widespread consensus that the copper market will move into surplus next year. Given that, the SRB may well choose to wait – particularly if prices now hold above $7,000.

All the same, the possibility of a large-scale purchase may be enough to give bearish hedge funds pause for thought. Just as bond traders live by the maxim, “Don’t fight the Fed”, copper traders are unlikely to want to do battle with the SRB.

The Commodities Note is a regular online commentary on the industry from the Financial Times