Citi Research published a commodities report yesterday titled “Metals Focus”. The report was largely focused on current developments in the copper market, especially the “hidden stocks” copper Citi analysts David B. Wilson, Jason S. Sappor and Ivan Szpakowski suspect are building up in China and elsewhere. They argue these hidden stocks together with overoptimistic projections for copper consumption in China are likely to lead to the price of Copper dropping below $7,000 per ton in the second half of 2014.

Copper Demand

Wilson et al summarize their viewpoint on copper below. “With inventory clearly rising in Shanghai bonded and SHFE warehouses, we see little prospect of LME copper prices moving outside the current $7,000-$7,500/t range in the short-term. However, we expect rising Chinese refined production to push LME prices below this range during H2.”

Excess of copper in China

In the first leg of their argument, the Citi analysts highlight a current excess of primary copper when you compare 2013 copper consumption figures with imports and domestic production. “China appears to have had excess availability of somewhere between 270,000-900,000 mt of primary copper, depending on whether the Wood Mackenzie/Antaike production/consumption numbers are accurate.” These figures include a 2013 copper consumption growth rate ranging from 8.6% to 11.7%.

Copper Metal Consumption

Finding the hidden stocks of copper

The report also points out that it is somewhat unclear what has happened to the stocks of copper the figures say should be piling up. They argue the hidden copper stocks must be stored in private warehouses along the financing chain as well as yet-to-be declared additions to the Chinese State Reserves Bureau.

“We believe that large volumes of collateralised financed metal are being held in bonded warehouses not only in Shanghai, the focus of most bonded estimates, but also in other Eastern Seaboard port cities. We also believe that metal might be being held in ‘hidden stocks’, essentially in the form of on-shore customs cleared stocks,which we believe are being used by some Chinese corporates as a collateral tool to secure loans at reduced interest rates. However, this is not the only source of non-reported or not estimated stock holding and stock builds. The Chinese State Reserves Bureau (SRB) is a holder of large volumes of copper in China. There was strong, though unsubstantiated, market speculation that the SRB were active copper buyers during H2 last year.”