London 31/08/2016 - A steady jump in LME copper inventories over the past week is a warning sign of an economic slowdown in China, market observers said.
LME stocks have risen for seven consecutive days, climbing almost 70,000 tonnes to their highest since October 2015.
The increase has been centred on Asia - poor Chinese physical premiums are encouraging holders to move metal into LME sheds. The Asian stock total has climbed 42 percent since the start of August and is up 200 percent year-on-year.
"We have heard that part of these deliveries were from Chinese producers being able to export on tolling agreement, while part are from traders who diverted their long-term shipments to Asian locations due to lower premiums and to take advantage of warehouse incentives," a trader said.
Singapore stocks climbed 3,300 tonnes higher today to 73,075 tonnes. Although they are down slightly from 75,850 tonnes at the start of the month, they still up from 12,775 tonnes at the start of the year.
Inventories in Busan are up 69 percent at 66,325 tonnes since the start of the month and 10,050 tonnes at the start of the year.
Gwangyang now holds 38,600 tonnes compared with just 1,800 tonnes at the start of the year and the Kaohsiung total is up 31 percent since August 1, having started the year at just 4,250 tonnes.
Port Klang holdings have doubled to 16,275 tonnes this month, with more than 4,000 tonnes arriving on Wednesday alone.
Three-month LME copper hit a two-month low on Tuesday, testing $4,600 at one stage, with a jump in short position holders on Comex adding to the bearish undertone - net short positions reached their highest for nine weeks at 6,000 contracts in the week ending 23 August.
But some short covering on month-end activity has helped to push copper higher - at $4,623 per tonne recently, it was up $16 on Tuesday's close. Meanwhile, spreads have narrowed while shorts look to cover - the benchmark cash/threes was last at a contango of $12, having been around $15 last week.
Market participants are divided over whether the copper influx will continue. While one market participant told FastMarkets that further increases are likely amid a lack of Chinese demand, pushing copper as low as $4,000, others believe the bulk of increases have been made and that stock moves will be more routine from now on.
Copper is currently finding support despite pressure from currencies and LME inventory rises, another trader pointed out.
"Shanghai copper [is] trading at parity with LME plus logistical premium into China upon the front prompt and any opening in import arb opportunities [is] likely to stem flow of material into Asian LME warehouses," he added.
The LME-SHFE arbitrage window, which has been closed for most of this year, has shown signs of improvement.
"It's almost open and we could see a window soon for more imports and better premiums," a European trader said.
But several leading banks highlighted poor Chinese data and LME stock increases as reasons to fear a slowing of growth in China.
Chinese imports of unwrought copper and copper alloy rose 4.1 percent year-on-year but were down 18.4 percent month-on-month at 310,000 tonnes in July, according to the country's General Administration of Customs.
Export of unwrought copper and copper alloy rose five-fold year-on-year to 75,022 tonnes in July. Year-to-July exports doubled to 280,831 tonnes from the same period of last year.
These factors suggest that the domestic market cooled off for copper, forcing producers to sell material outside China, Barclays noted.
"The recent spike of LME inventories may be an early sign that August will be similar to July, in that the fundamental demand situation has not changed within China, forcing traders to export material from China into the LME system," it said.
JP Morgan expects the Chinese copper market to record an 800,000-tonne surplus in the first three quarters of this year amid strong domestic smelting output and lukewarm demand.
Copper is "entering the eye of the supply storm", Goldman Sachs warned earlier this month, adding that solid mine supply growth in the first half has reflected the ramp-up of new mines and lower-than-normal disruptions.
"This wall of supply is expected to translate in to higher copper smelter and refinery charges and ultimately, higher refined copper production - set against softening demand growth," it said.
(Additional reporting by Vivian Teo and Perrine Faye, editing by Mark Shaw)