The drop has been widely attributed to reduced end-of-year credit appetite from financiers, who use copper as collateral in the shadow banking sector.

Most commentators have instead focused on last month's record imports of iron ore as a sign of manufacturing recovery in the world's largest buyer of industrial raw materials.

Last year's 4.65 million tons of cumulative imports of copper still marked a 14 percent acceleration from 2011 and a new all-time record, eclipsing even the 4.29 million tons imported in 2009, a year when imports soared on the back of post-meltdown, bargain-basement prices.

These preliminary figures aggregate imports of copper in various forms but it is almost certain that imports of refined metal also notched up a new record of around 3.40 million tons in 2012, unless there was a drastic change in November's product ratio split.

This Chinese import boom has, however, left an unwelcome, destabilizing legacy, one that will determine not only the level of imports this year but, quite possibly, the structure of the entire global copper market.

Legacy

The copper market is now collectively wise to the fact that what China's customs department classifies as an import may only travel as far as Shanghai's bonded warehouse zone.

What was once little more than a statistical quirk has assumed ever greater importance as accelerated "imports" over the course of 2012 coincided with a marked slowdown in the Chinese growth story.

The result has been a massive build in Shanghai bonded stocks, something in the order of 500,000 tons over the last 12 months.

At an estimated 800,000-900,000 tons they dwarf the 543,000 tons held at the end of December in the warehouse systems of the world's three foremost copper trading exchanges, namely the London Metal Exchange (320,500 tons), the COMEX (64,150 tons) and the Shanghai Futures Exchange (158,200 tons of duty-paid metal).

This Shanghai mountain is "dark" inventory. Not just because there is no official monitoring of its size, leaving the market reliant on guess-timates, but also because it is unclear who exactly owns it and how mobile it is.

The answer to the first question is financiers, but it is a catch-all word that could, and probably does, mask a wide spectrum of players with differing implications for how liquid this inventory actually is.

It's noticeable that when China's major copper smelters had to deliver against short positions on the London Metal Exchange (LME) back in the second quarter of 2012, they did so from their own production rather than trying to tap what was in the Shanghai bonded zone.

False Sense of Security

The short-term implications of this legacy from the 2012 import boom are likely to be felt first and foremost in China itself.

This growing buffer stock in Shanghai has served both to dampen volatility in the London-Shanghai arbitrage, which remains negative for profitable imports, and physical premiums in China. As of mid-December these were quoted in a $40-65-per ton range over the cash LME copper price.

Compare and contrast with the premium range of $98-105 per tonne being asked by Chilean producer Codelco for 2013 term shipments to China.

It seems highly likely that Chinese mainland buyers will accordingly go light on this year's term commitments. "Must-have" metal will still be booked, make no mistake, but why go for extra tonnage when there's nearly a million tons of metal sitting on your door-step?

Particularly when China's own production of the red metal is likely to re-accelerate from this year's 8-percent growth rate thanks to better raw materials supply.

Imports of concentrates were up 18 percent in the first eleven months of 2012, hitting consecutive records of 716,000 tons and 832,000 tons (bulk weight) in October and November respectively. That may herald a step-change in availability as global mine supply finally shows signs of emerging from years of systemic under-performance.

Chinese buyers, however, risk being caught off-guard if consumption growth this year turns out to be better than expected.

Because another by-product of this Shanghai stocks mountain appears to be the run-down of manufacturers' own copper inventories to extremely low levels.

Again, why worry when there's so much metal sitting in the port of Shanghai? Assuming, that is, that this metal is actually available on a spot basis.

Even if it is, it will require sharp shifts in both arbitrage and premium levels to entice it onto the mainland, at which point value-added-tax must be paid.

The scale of those shifts will be magnified if it turns out that much of the metal is locked up in financing deals.

False Sense of Security

The build in Shanghai bonded stocks carries risk for the market outside of China as well by offering what may turn out to be an equally false sense of security.

At the LME close yesterday the benchmark cash-to-three-months spread was valued at $34.00 per ton contango. This is the widest it's been since May 2010.

True, LME stocks have rebuilt over the last couple of months and at 326,575 tons they are near their highest level since January last year, a telling comparison given the seasonality of the copper market, characterized as it is by end-year stocks build.

But by any historical yardstick this is still a low outright figure and it looks even lower if the 68,400 tons of cancelled LME stocks are stripped out.

Throw in the fact that significant tonnages are located at what might be termed "problematic" locations, characterized by long load-out queues for other metals, such as New Orleans (65,900 tons of open warrants), Antwerp (30,400 tons) and Vlissingen (10,150 tons) and it should be clear that real availability is much diminished.

That wide contango is predicated on an assumption that if the world outside of China needs extra metal, it too can simply draw it out from those Shanghai bonded stocks.

But that would require a significant shift in spreads, similar to the flip to sharp backwardation in Q2 2012 that occasioned those Chinese smelter exports.

In other words both Chinese and non-Chinese copper markets are behaving as if the world is in comfortable surplus with a comfort blanket of inventory. Which in statistical terms it is, certainly as far as the stocks component is concerned.

It's just that the biggest tranche of those stocks is the least known quantity, both literally and, more importantly, qualitatively.

What will it take to move it? It may not be too long before we find out. (Reuters)