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No scarcity of copper in China – UBS

Ballooning supply is likely to mute copper prices over the medium to long term, making the ability to maintain margins increasingly important.

Tis the season for Chinese traders to replenish downstream copper stocks, but while some restocking is expected ahead of summer, price spikes are not, says UBS.

According to the bank, the main reason for this is high warehouse stocks that have subdued the price traders are willing to pay for local metal. As a result, it says, writing in a new note titled, ShortKut: Will China Restock? Currently, copper traders in China seem comfortable with the abundance of metal. 

“Inventory managers don’t want to run out of stock, but they also don’t want to be caught holding high-cost metal for long periods. Prudent managers of copper inventory are aware of SHFE and LME Asia warehouse stocks, which are at record highs and trending up,” the bank writes. 

Adding, “Profit-minded business managers will watch prices weaken, wait for them to stabilise, and then restock. Any large rallies in the copper price will see buyers leave the market.”

As a result of this the bank says, while seasonal restocking will support the price, of copper over the next six weeks or so, “beyond that, prolonged restocking is unlikely and there’s little chance of a large, sustained lift in the copper price.”

“So we expect prices to trade towards $8,200 in the next six weeks, but investors should reconsider copper exposure in May,” the bank writes. 

Longer term, the bank believes that the “ballooning supply” will weigh on the price outlook for 2014. On the back of this belief, UBS says the ability to maintain margins is important, which is why it likes miners that can “somehow maintain margins in this environment (cost-cutting options or through a diversified commodity portfolio), including Glencore-Xstrata, Rio Tinto, Freeport-McMoRan.”

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