London 09/05/2016 - A fall in Chinese copper imports has unsettled market participants amid concerns that this trend could continue into the months ahead.
And should market conditions continue to deteriorate, investors could unwind positions, adding further downward pressure on copper prices, analysts said.
Chinese trade data disappointed - imports of unwrought copper and copper products totalled 450,000 tonnes in April, down 21.8 percent from March's record high of 575,650 tonnes.
A favourable arbitrage window, a surge in fixed asset investment and a recovery in seasonal demand helped push imports into China higher in March. But the closing of the arb and a lack of physical demand painted a different picture at the start of the second quarter.
Consequently, several analysts said copper import data will be softer while bonded-warehouse availability is ample, while premiums in Shanghai remain soft at $50.
Citi Bank expects a sharp fall in copper imports in May, citing strong domestic supply during a lighter refinery maintenance schedule than in recent years, the SRB concluding its 150,000 tonnes of purchases and planned capacity additions.
Barclays, meanwhile, doubts that China's copper imports will reach new records in the coming months, believing that the weak cathode premium in Shanghai shows that domestic end-user demand is soft.
"If a reversal in trade data occurs, a compelling driver of higher prices will stall," the bank warned.
The LME three-month contract has stalled - having eyed $5,100 per tonne towards the end of last month, copper has since reversed to around four-week lows just above $4,700. The SHFE July copper contract is also trading at four-week lows, ending today at 35,840 yuan.
"In the first quarter, copper benefited from surging China commodity imports, a recovery in the iron ore price, a weak US dollar and the prospect of further stimulus from China," Barclays said.
"All of those conditions, except perhaps the US dollar, have reversed course in recent weeks, and two key indicators of China's spot demand for the metal, inventories and the cathode premium, are sending warning signs," it added.
Total stocks held in SHFE and LME now stand at 472,700 tonnes, of which the former has 313,168 tonnes and the latter 159,600 tonnes.
Metal was moving in only one direction - from West to East - in the first quarter. SHFE stocks topped out at close to 400,000 tonnes at the start of 2016, "above and beyond the normal seasonal increase in copper metal", Barclays said.
The increase in SHFE stocks also reflected the fact that the record imports were not being consumed but were ending up in Shanghai sheds.
"This led to a visible weakening of the domestic physical market, which is now reducing the incentive to ship copper to the Asian nation," Bank of America Merrill Lynch (BoA ML) said.
"Indeed, we expect China's copper purchases to remain subdued in the coming weeks, as the country draws on the stocks that have been built. In turn, this reinforces our near-term cautious view on copper quotations," it added.
The closure of the arbitrage window, weak Shanghai premiums and warehouse incentives shifted the tide in April - metal started to arrive in LME-registered sheds in Asia albeit at a slower pace than it flown into Shanghai
And SHFE stocks rose last week for the first time in six weeks, up 1,200 tonnes, data showed.
"If the rundown in inventories continues to stall, or if the recent build continues, this could be a very worrisome indicator of poor spot demand - and an oversupplied market," Barclays warned.
Adding to the dour outlook are concerns that investors could turn their back on risky assets such as commodities. High inventories in China could convince "unsteady" investors to lower their exposure to copper and related industrial metals, Citi said.
"Further investor liquidation also has the potential to drive prices deep into the cost curve once more. With financial market drivers clearly in charge, fundamentals are likely to prove to be too weak to offer much support to prices," Dan Smith at Oxford Economics said.
Still, ANZ is confident that metal's outlook will improve - while the spread between the two exchanges was negative in March, it has since narrowed to around $30 per tonne, which should help support import demand in May, it said.
Chinese copper imports should also receive a boost from strong consumer demand on restocking for the peak demand season, it added.
(Additional reporting by Vivian Teo, editing by Mark Shaw)