Chinese copper imports tumbled 16% in May.
Year to date China is still importing refined copper at a record setting pace – up a whopping 34% over 2013 to 2.1 million tonnes.
This at a time when the Chinese economy is expanding at is slowest pace in more than two decades.
The mismatch is ascribed to the popularity in credit-starved China of the red metal as collateral in trade financing agreements.
But May's sharp drop indicates these deals may be unwinding at a more rapid rate than previously thought.
With all the focus on the unwinding of China's metal-backed loans, it's easy to lose sight of copper's ugly demand fundamentals
As part of its efforts to rein in the country's vast shadow banking system, Beijing has been clamping down on the practice.
At the same time a weakening yuan – another deliberate policy – has pushed many of these arrangements under water.
Last week's revelation that authorities are probing whether traders at the port of Qingdao pledged the same copper, iron ore and aluminum inventories as collateral for loans multiple times to different banks, could turn what has been an orderly exit into a stampede.
With all the focus on the collateralised loan business it is easy to lose sight of the fundamentals of the copper trade.
Unfortunately here the outlook is no rosier.
Capital Economics in a research note points out that construction and infrastructure typically account for nearly 60% of China’s copper usage and while Beijing is providing some support to these sectors through its affordable housing programme and expansion of the electricity grid, "the bigger picture is of weakness in the metals-intensive construction sector."
The close correlation between the copper price and the building sector is clear from this chart.
But early on in 2014 this relationship broke down.
And the most likely scenario of how this link will be restored is not a sudden building boom (Beijing is very wary of any economic stimulus), but a sharp correction in the price of copper.
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