Chinese Copper Inventories Revealed To Be Double Estimated

Tyler Durden's picture

In a piece of news that can not be taken well by students of Dr. Copper, the FT reveals for the first time that China's estimated copper inventories, based on numbers from the China Non-Ferrous Metals Industry Association, were 1.9 million tonnes at the end of 2010 which is almost double the lower end of the consensus estimate of 1.0-1.5 MM tonnes (and, as the FT points out, "more than the US consumes in a year). So while copper is doing its high beta thing on the nth short squeeze day in stocks, the smart money is starting to bail for very obvious reasons. And if the reasons are not obvious, this means that "The estimates, which were announced at a recent meeting of the International Copper Study Group but have not been made public, imply that real Chinese copper demand may have been lower than thought in recent years." In other words, and to all who are still confused by why Zero Hedge jokes at each and every iteration of economic growth driven by "inventory stockpiling", this is nothing other than trying to do at the national level, what Goldman and JPM do at the LME level each and every day: hoard and sell, only in China's case it is more hoard and forget. Alas, when China itself is the only real marginal buyer (not to mention that millions of domestic businesses operate using Letters of Credit backed by copper), things get very, very ugly, and explains why China has been so secretive about this number.

From FT:

The CNIA estimated that Chinese copper stocks, not including those kept at Shanghai Futures Exchange warehouses, stood at 1.768m tonnes at the end of 2010, up from 1.218m in 2009 and 282,000 in 2008. SHFE inventories were 132,000 tonnes in 2010, putting China’s total stocks at 1.9m tonnes.


Other than exchange stocks, copper is held as working inventory by China’s manufacturing sector as well as by merchants, investors and the State Reserve Bureau, Beijing’s stockpiling agency. However, analysts, investors and traders are sceptical, noting that the world’s largest copper importer and consumer has an interest in inflating the size of its stockpiles, which could push prices down. The CNIA declined to comment.

That loud whooshing sound is long copper PMs sucking in air as they scramble to find the proper spin for this shock. Such as this one:

“Whatever the Chinese say that stocks are, in the end they still need copper,” said George Cheveley, metals and mining portfolio manager at Investec Asset Management.

Yes they will. And they will use the millions of tonnes they have in storage, not buy in the open market. Of course, this means that China will continue to buy US Treasurys and not diversify entirely to commodities. The opportunity costs of continued copper demand, however, is the difference between the 10 Year at 2% and 12%...

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darteaus's picture

You can tell what the inventories are based on the price action.

Pladizow's picture

Copper or


Whats the right choice for a nation that plans centuries ahead?

CharlieSDT's picture

This should be bullish for silver- as copper mining goes down that's less silver getting mined as a byproduct.  Also maybe those assholes will stop breaking into people's houses to steal their copper plumbing.

nope-1004's picture

Not sure what to believe anymore.  I know one thing:  To continue to print into oblivion and finance insolvent banks, the gov'ts around the world will do, say, and publish almost anything to get the required result - ie, deflation.

Of course there is a slowdown, we can all feel it.  But if QE had worked, would this copper article have ever surfaced?

I'm suspicious because in the end we need more QE, but not while commod's are high.



Smithovsky's picture

China getting ready for Bancor.

DormRoom's picture

yup.  That is why China is in Africa.  It wants to lock in the huge mineral resource of this continent.  And her navy can protect supply lines.

macholatte's picture

Not sure what to believe anymore.

The article is about what they estimated a year ago.  And they admit that it doesn't include all the warehouses.

How is that germaine today? Is this just the residue of another set of worthless numbers that someone pulled out of his ass because he had to write a report?  What am I missing here?


Not only do I not know what's going on, I wouldn't know what to do about it if I did.
George Carlin

NotApplicable's picture

Interesting how the LME rule allows GS to squeeze the aluminum market.

youngman's picture

I agree..if I had all that US and Euro toilet paper...I would buy the hard stuff too...oil also....stockpile, stockpile, stockpile...I do not see it as a bad thing....they do think long term..they just bought a bunch of corn yesterday

Minimum Clearance's picture

Just out of curiousity, when did China begin "planning centuries ahead?"  During the Mao years?  During their most recent civil war (you know, the one that was put on hiatus, sort of, during WW2)?  Maybe before that, while the Japanese were invading in the 1930'?  During the Boxer Rebellion?  The Opium Wars?  Please let us know.  Thanks.

nyse's picture

Not surprised by this then? Great job!

Piranhanoia's picture

Should energy and the costs of mining be factored in,  did they buy cheap in the long run to have a out of ground supply?  It sure seems like unused inventory, but the energy and ROI story from yesterday seems to fit?  Not my area, just curious.

The4thStooge's picture

maybe they're preparing to go to war soon.

Ancona's picture

I think they have lied about nearly every other commodity as well. Why would anyone believe their "official" numbers on anything?

MrBinkeyWhat's picture

If there is anyone on this board that believes "official numbers" about anything. Step on out: Fight Club


SheepDog-One's picture

'FT'? *cntrl-alt-del* article.

prains's picture

oops, so sarri

Ahmeexnal's picture

This means Chilean spring will accelerate.

Already fascist Pinera has banned protests.  And the MSM is not following the massive riots going on down there.


Shitters_Full's picture

Preach on, ye of the long beard.

nyse's picture

It has been said that "no one is expecting the Spanish revolution," but no one is expecting the Chilean Revolution.

DosZap's picture

This means Chilean spring will accelerate.

Already fascist Pinera has banned protests.  And the MSM is not following the massive riots going on down there.



Damn, scratch ONE safe haven off the list of four.

qussl3's picture

You can eat copper no?

hedgeless_horseman's picture

Fast food when wrapped around lead.

wombats's picture

It's best served 125 grains per serving.

UP Forester's picture

.... also good at removing pesky blue helmets....

traditionalfunds's picture

Hate to say it. Suppose this is bad for silver too. 


Also Tyler did you notice the Alcoa CEO was bashing Aluminum shorts for the poor results during the conference call?


Unlikely he had a problem with them when prices were high or when his raised prices stick.

tekhneek's picture

OH, they're actually not the same metal.

Silver is silver and copper is copper.

More copper above ground supply = less copper ore being mined which means less silver as a byproduct which means less supply of silver for the already raped above ground supply.

Please elaborate how this is bad for silver.

traditionalfunds's picture

Long term you are right about that and that is why I have plenty of physical silver.

Short term trades are made based on the relative price of other commodities so I stand by the potential for downside. Would not be surprised to see $22.

I won't sell my physical silver soon but am not married to it nor am I opposed to hedging gains. 



Oh regional Indian's picture

Copper, perhaps being stockpiled for some unknowable reason (liek fooling the world maybe). But I'll tell you this. They bought one heck of a lot of Iron ore from India these past 5-7 years. 

A lot. Millions and millions of tons. Paid crazy prices, bribed the government, created political goon control territories in states that had ore. Crazy, Two of India's states are comping with Enormous environmental destruction as Chinese agents mined thousands of hectares bare.

And one only need look at their build up over the past few years (all those ghost cities for example).

And they've clearly built everything shoddy and for the short term. So lots of steel and not much copper.

Are those ghost city apartments just shells? Curious. But China is a Sham, just like my once great country that never was till the british made it so.


The Perversion of Language

spartan117's picture

Let me see.... would I prefer to have 1.) fully built cities paid for by money printing, or 2.) lots of Federal Reserve Notes.  I think I'll go with the former.

nyse's picture

Yeah, but they are fully built Chinese cities. 

Checkit! -


carbonmutant's picture

Cities built with hollow piling and no rebar....WTF??

It makes you wonder if their economy is built the same way...

Hephasteus's picture

It's ok ORI. They messed up the poor irish even more.

gringo28's picture

whatever. if you thought Chinese data is trustworthy, tool you. here's the fact: copper, and othe hard commodities, will be consumed and the Chinese are not afraid of stockpiling. stop thinking so western-like Mr. Chanos.....

gringo28's picture

whoever dinged me is a frikin moron. we are in a secular commodities bull market. do you really think this shit isn't released for a reason? what are you waiting for, the Chinese to announce that they are actively substituting paper assets for hard assets in order to (a) build resevres for future growth and (b) provide alternative investments for their internal economy? fucking morons like Chanos who think China is going to impload so he can make a bunch shorting australian miners. FCX is dirt fucking cheap and 50% of its remaining 2011 sales is fucking hedged at over $4/lb. read the filings and weap shorts macromavens......

Raynja's picture

Little do we know the copper is stored in the form of bullets.

Mercury's picture

Still, better than having a stockpile of....paper

nobusiness's picture

Cheap copper equals cheaper houses???  Bull market continues.  Go back to buying the dip please, nothing the see.

firstdivision's picture

I'm shocked, absolutely shocked, to hear that China tried to hide factual numbers.

A Man without Qualities's picture

The fact China has been exporting far more than needed is widely known.  It's interesting how quiet the copper miners have been on the topic of demand for more than a year now, whereas the likes of JPM (who have an ETF to sell after all) have been banging on about supply shortages like they are some sort of boiler room operation.  To my mind, it also explains why equity prices have declined faster than the underlying...

The question is whether inventories have been rising as Chinese financiers need to keep the price high in order to prevent the copper collateral financing game going....

cosmictrainwreck's picture

well, shit....they gotta spend all that loot on somethin', right? they've been stockpiling the Cu for YEARS. This is news?

DonBadajoz's picture

What is copper good for... industry and FUCKN BULLETS!... they are gearing up for war.

zerozulu's picture

If we underestimated China's copper reserves, trust me we are underestimating China's GOLD reserves too.

Roy Bush's picture

Jim Rickards tweeted about this yesterday with this article....

The Chinese are using copper stocks for collateral.

Roy Bush's picture

Here's the article:

October 10, 2011 | 1208 GMT LAURENT FIEVET/AFP/Getty Images Cargo ship anchored in Hong Kong Summary

The price of copper has dropped 30 percent since early August, reaching a 14-month low. Because businesses in China have been using copper as a financing tool to bypass the tightening of credit markets, the repercussions on the Chinese economy of a sustained drop in the copper price could be widespread. Beijing may not be able to do anything to significantly counter this threat, as copper is already being widely used for financing and Beijing does not want to enforce any new regulations that could sacrifice economic growth and employment.


Copper prices have been experiencing increased volatility in recent weeks, dropping 30 percent since early August and reaching a 14-month low as a result of Europe’s deepening debt crisis and the overall slowing of the global economy. China has been using copper as a financing tool, thereby linking it to financial and real estate markets. This means that a sustained drop in the price of the metal — certainly a possibility amid the recent volatility — could deliver an unexpected hit to the Chinese economy.

The Use of Copper in Financial Markets

Even though China is the world’s largest consumer of copper, the drop in prices has not come as a welcome development. This is because of the different ways China uses copper. Though China’s demand for the metal has surged over the last 10 years due to domestic construction, industrial production and the needs of the manufacturing industry, copper has also taken on an important role in financing. An increasing number of Chinese firms have been using copper as a financing tool — stockpiling the metal and using it as collateral — because the government’s measures to curb inflation have limited the firms’ access to credit. Such financing links the price of copper to other key elements of the Chinese economy, including the growing speculative real estate bubble.

China’s tightening monetary policy has made it more difficult to access credit through official channels. As a result, Chinese small- and medium-size enterprises (SMEs) have increasingly turned to copper for use as collateral in loans, which are then funneled into other sectors of the economy. The falling price of copper means that the collateral initially put up for the loans in yuan is no longer worth what it once was, decreasing the likelihood that the borrower will be able to pay back the loan. If firms default on debts, then others connected in the chain will default — and determining where loans have been invested is nearly impossible.

Banks and state-owned enterprises (SOEs) are also potentially vulnerable. A high number of SOEs have also used copper as collateral. These firms are often involved in the real estate sector — even if their primary function is not always directly linked to it — and are therefore exposed to the country’s growing real estate bubble. The government would bail out the more politically favored SOEs if necessary, but that would leave fewer resources to be allocated to the private sector that is crucially important to China’s growth.

How Financing with Copper Works

As China considers raising interest rates further and implementing other measures to tighten credit, businesses continue to use more complicated methods to obtain loans. The procedure for using copper as a financing instrument has typically gone as follows: SMEs and SOEs apply for a low-interest loan to buy copper on the international market using U.S. dollars, deferring payment on the loan for three to nine months. The copper is imported and stockpiled in warehouses in China, and the warehouses issue the borrower a letter of credit confirming the amount of copper stored at their facility. Borrowers bring this letter of credit to Chinese banks and can exchange the rights to the copper for around 80 to 85 percent of its value in yuan, which they can immediately turn around and invest in other sectors.

Due to the yuan’s general appreciation against the dollar, the borrower is in theory virtually guaranteed to make a profit during the initial three- to nine-month period, in addition to whatever they earn by their investment of yuan. Because of the apparent upside involved in trading assets purchased with dollars for yuan and the overall tightening credit environment in China, which makes it more difficult to secure loans through other channels, this approach has become quite popular. In fact, according to STRATFOR sources, virtually all copper imported into China over the past three months has been used for financing.

(click here to enlarge image)

Potential Fallout and Beijing’s Response

Beijing issued new regulations in late August requiring banks to place part of the original loan in a low-yielding reserve account instead of allowing it to be used to invest yuan elsewhere in the economy. But because the use of copper as collateral developed as a way to bypass lending regulations, there is no mechanism in place to track how much of the inventory is tied up in these financing deals, meaning the extent of the risk also cannot be measured. But China’s copper demand was up by nearly 100 percent between 2005 and 2009, during which time Chinese gross domestic product rose by only about a third, according to the International Copper Study Group.

There is little doubt that a significant proportion of this copper has been used for financing, given that industrial use alone does not account for the increase. Warehouses bonded to the London Metal Exchange (LME) also saw Chinese copper inventories increase 17 percent in the first quarter of 2011, compared to a drop in the purchasing managers index manufacturing rate to 52.9 percent during the same period, according to the China Federation of Logistics and Purchasing. That this figure only includes inventories registered on the LME again suggests that a high percentage of imported copper is being used to finance credit.

Any move by Beijing to institute new regulations to limit this activity may prove to arrive too late. Speculative tools like copper and real estate have been used in informal and formal lending, making them harder to regulate, thus increasing China’s vulnerability to price declines and financial risk. Beijing understands it needs to clamp down on copper speculation, but it is wary as this may lead to a big rise in nonperforming loans at banks.

A drop in copper prices appears on one hand to be a good thing, since China’s demand for copper is growing faster than production. On the other hand, if the value of China’s stockpiled copper collapses, the impact on those using copper as collateral has widespread ramifications. Such a collapse would result in a much worse outcome for Beijing and would parallel similar problems China faces in managing bubbles in, for instance, real estate. There are few safe investments, and the system is more stressed than it appears.

Beijing will find it hard, while installing new regulations, to achieve the contradictory goals it is pursuing — keeping the economy growing even as it tightens lending. It cannot sacrifice growth and employment, so it is unlikely to take measures to halt the copper financing practice completely.

CharlieSDT's picture

Very interesting article.  Leave it to the Chinese to figure out how to do business in tight credit markets.

Quinvarius's picture

This data is 9 months old and it is an estimate.  It is very actionable after copper's decline this year.  LOL.  I don't have a copper opinion.  But the one I adopt won't involve some obscure group's 9 month old estimate based opinion.

apberusdisvet's picture

Those Chinese warehouses full of copper are really just the collateral being used for real estate loans; bubble anyone?

Nothing to see here.  If an 800 lb gorilla falls from the top floor of a 100 story building, it will be spun as a "soft" landing.