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Shanghai Copper futures are building in massive expectations for the Doctor's summer...

 Industrial & Commercial Bank of China reported a Q1 profit increase of 6.2% on rapidly expanding credit today, with comments suggesting that that the torrent of loans will not abate anytime soon. If you read our comments on the increasing liquidity in the Chinese credit market ("Gushing" 4/13) you know that we harbor two serious reservations about the surge there:

1. inflationary pockets
2. bad loans

At 1.97%, the ICBC NPL ratio looks good (for now) but potential evidence of bubble formation is being provided by the good Dr. Copper.

YTD, Shanghai futures contracts have led COMEX and LME contracts on a return basis as trading volume has exploded.
*more comments before and after charts

Chinese Demand: Bubblicious? - cop1


Chinese Demand: Bubblicious? - cop2

While Shanghai contracts have shown greater strength, they have also exhibited a more pronounced backwardation on a percentage basis.  Meanwhile total open interest going into the summer exceeds total imports for the same months last year significantly.

Chinese Demand: Bubblicious? - cop3


While the copper bulls in the rest of the world have been driven by the anticipation of the stimulus program in China, local traders appear to be driven by more than just raw demand from the hungry Ox. With credit flowing through the system the Shanghai copper futures market appears to have become a preferred domestic venue for speculation on the recovery.

We remain bullish on Chinese demand for basic materials tactically because we think the brute force of the stimulus measures, particularly the infrastructure build out, will create sustained demand for the remainder of the year.  As always however, price action is king in our world: if we judge Copper's momentum to be driving it to levels well in excess of real demand we will short without hesitation.

Andrew Barber