In a note out late last week, French bank, Natixis, queries the assumption that the copper market is already in surplus.

While it doesn’t dispute that the copper market could move into surplus over the next few years, the bank maintains that saying it is already in surplus could be premature.

The reason for the dispute is the level of stocking or destocking in China that has taken place over the last few months – an issue that caused problems for copper price predictions previously.

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According to Natixis, if one goes only by the level of copper stocks held in exchange warehouses, which it defines as those belonging to the LME, SHFE and Comex, then it does look decidedly like the market is in surplus, as these stocks have risen by about 110,000 tonnes since the beginning of the year.

But, it says, “Anecdotal reports suggest that stocks of copper held at bonded warehouses in China peaked at somewhere between 1mn and 1.1mn tonnes in January, and have since fallen to a low of little more than 300,000 tonnes. Netting off 110,000 tonnes of higher exchange stocks versus 700-800,000 tonnes of lower bonded stocks suggests a substantial deficit.”

The problem that faces Natixis, however, is trying to figure out how much of these withdrawn stocks have actually been consumed.

The group then posits 3 different models in a bid to solve that question.

The first supposes that Chinese imports of refined copper have averaged roughly the same as in 2012 – “somewhere around 280,000 tonnes per month”.

Such an assumption, taking the data from the first five months of the year, would imply, “Chinese destocking of a little over 300,000 tonnes of copper, followed by a neutral effect between June and August”.

The second model, examines the data under the assumption that Chinese end-user demand for copper grows in line with GDP.

“Under this model,” Natixis writes, “measuring estimated demand versus apparent demand (production + net imports -stock changes in reported inventories) would give us destocking from unreported inventories of almost 300,000 tonnes over the first four months of the year, followed by restocking of around 165,000 tonnes in the months since then.

The group says it is more inclined to believe the above two models than the third one which is based on copper semis fabrication.

While it says, that this last model provides “a number most closely in line with the anecdotal fall in stocks at bonded warehouses, we suspect that this overstates the true situation substantially, since many of these bonded copper stockpiles were reportedly diverted to other warehouses in the Far East”

According to Natixis, between January and June, stocks of copper held at exchange warehouses rose by just over 340,000 tonnes.

Since then, it says, exchange inventories have fallen around 15,000 tonnes per week.

But, it adds, “Around the turn of the year, aggregate volumes of copper futures traded on the SHFE fell to abnormally low levels, alongside a decline in aggregate open interest. After the sharp decline in copper prices in April, SHFE futures volumes surged and open interest peaked. This not only suggests a period of destocking early in the year, but also supports the idea that Chinese buyers began to restock in response to lower prices over the summer months.”

Adding, “If, as our models suggest, Chinese destocking accounted for around 300,000 tonnes of copper early this year, measures of consumption based on end-user demand rather than apparent demand would give us a deficit for the year of anything from 60,000 to 225,000 tonnes.”

It is difficult to know whether or not this is an accurate view. But if it proves to be so, it could result in unexpectedly higher prices for the red metal over the next few months.