Saving for a Rainy Day: Is Chinese Copper Stockpiling Setting the Market up for a Squeeze?

China’s leadership will soon meet to discuss the next five-year economic plan.

A key element of this plan is to stockpile copper as a strategic resource.

China lacks the domestic sources to adequately supply its active power and construction industries.

Some of the potential reasons for this move include strained relations with the U.S and the impact of COVID-19, which is causing China to shore up stockpiles in order to safeguard supply.

In the first nine months of 2020 copper imports increased 41% from a year earlier.

Imports of 4.99 million tonnes so far this year are more than for the entire 12 months of 2019.

China’s stockpiler, The National Food and Strategic Reserves Administration, claimed it was not aware of any stockpiling plans laid out by the Chinese government.

On the economic front, China’s Caixin Purchasing Managers’ Index (PMI) reached the highest reading since 2011 in August of this year and has remained steady moving into the month of October.

More specifically, new export business is expanding at the fastest rate since earl 2011 and purchasing activity is also at multi-year highs.

CHINA CAIXIN MANUFACTURING PMI 2011-2020 DATA 

Many traders and analysts are predicting a copper supply squeeze due to dwindling inventories.

Inventories are currently running at their lowest levels in more than a decade.

An illustration of this can be seen on the London Metal Exchange (LME) where inventories are at a 15-year low, only about a day’s supply.

LME Copper Inventories

Demand from Electric Vehicles Will Also Drive Tightness Going Forward

Investment in renewable energy and electric vehicles are poised to increase as countries rehabilitate their economies in the wake of COVID-19 slowdowns.

Manufacturers in previously weak markets like Europe may seek to raise their inventories which will put added pressure on Copper spot prices.

Copper remains a major component in battery technology and demand from battery driven transportation is forecast to grow rapidly this decade.

Expected Copper Demand by Sector

With lowered inventories, increasing demand from China and a world still reeling from the global pandemic, macro investors are looking to copper as a hedge against rising inflation and a weakening U.S dollar as governments print money at a rapid pace.

With copper at its highest price since 2018, expectations are high of further price appreciation driven by Chinese growth and the antincipation of another large U.S stimulus package over the next few months.

Investors would do well to have at least some copper exposure to protect against inflation and as a bet on continued strong renewable energy demand.

As a reminder copper miners are the leveraged play on global economic stimulus, in the last stimulus driven recovery copper miners returned 360%  2 years after the market bottom, outperforming the S&P 500 by 180%.