China's strategy on the world copper market is rattling traders and analysts around the globe, as rumours swirl of plans to sell amid official denials of any intention to unload the red metal from strategic reserves.
The Central Reserve Bureau said on Tuesday it had no plans to sell copper on the world market, as no order had been received from central government authorities in Beijing.
Copper trading sources and market analysts in London and Shanghai said they had heard China was preparing to take advantage of high world prices to sell copper on the London Metal Exchange (LME).
A London-based analyst told Reuters late on Monday the timing was right for Chinese sales with the LME price hovering around one-year highs ahead of the traditional mid-year slump when industry in the northern hemisphere winds down for summer.
LME copper prices closed down on Monday at $2,485 a tonne, but were expected to regain a toehold above $2,500 on Tuesday. It looks like the reserve bureau has made some inquiries or intimated they may be gearing up to sell substantial tonnages to take advantage of the relatively high LME price, the London source said.
Figures mentioned by market sources for possible sales ranged from 30,000 to 50,000 tonnes. China's reserve authorities lent 83,000 tonnes of copper to the market in 1995, taking back 85,000 tonnes late in 1996.
Lending, rather than selling, the metal would have a reduced impact on the market as China's Reserve Bureau would not be taking a position, and would not need to buy the metal back.
The metal would be lent to the market at the prevailing cash price,s and taken back when it suited the lender, usually at a lower price, without upsetting the market balance. (Reuter)
Some sources pointed to the current backwardation as being too low for either selling or lending to make sense to China. (Reuter)
A trader with a state-run Chinese firm in Southeast Asia said the backwardation -- in which the futures price is lower than the spot price -- would need to widen to above $300 for positions one year forward before China's state reserve would sell or lend.
The LME backwardation for the third quarter of 1998 is currently quoted at $296/$306 a tonne.
Another trader said this level of backwardation would ensure all costs incurred in shipping the metal to LME warehouses in Singapore were covered with enough of a profit left over.
The objective is to make decent money, he said.
China has steered clear of the world copper market so far this year, with carryover stocks from high 1996 imports appearing ample for domestic consumption.
Traders and analysts generally agreed China would need to buy substantial amounts of copper in the second half of 1997, possibly 300,000 tonnes, and is waiting for prices to soften before it does.
That Chinese authorities might want to make some money on the market in the meantime would be quite likely, analysts said.
Timing-wise, it does make sense, the London analyst said. China's Central Reserve Bureau is administered directly by the State Council, or cabinet, which must give its permission before anything is lent or sold.
Government reserves are a state secret in China.
