Should copper prices be soaring?

Chinese demand has carried this bull market, and its survival could hinge on what the future holds for the Chinese economy. Imports have been slumping. The most recent data, released on July 21, showed that month-over- month copper imports for June rose by 19.7%. However, when compared with June 2010 – a more vital barometer of the long-term trend – year-over-year imports fell by 15.9%. Chart 3 shows clearly that, despite the handsome uptick in June, imports have been trending downwards for over a year now.

Analysts use the term “implied demand” when referring to Chinese copper usage, but that is really just import data. As such, demand is falling.

We’ve drawn attention several times to the phantom stockpile of copper held in bonded warehouses. It is not included in exchange warehouse calculations and is rumored to have grown to as large as 700,000 tonnes.

However, the very same sources that have publicized the information about the off-exchange inventories are now saying that the stockpile has fallen by half. This could mean that the copper is actually being used by bona fide industrial copper consumers and possibly explains the weak imports that we’ve seen over the past few months.

The most recent report from the International Copper Study Group’s (ICSG), released on July 21, shows that the global copper balance sheet posted a supply/demand deficit of 69,000 tonnes for 2011 through April.

The contango narrowed during the worst of the weather-related supply disruptions, but has returned almost to its widest level, even while prices are making a run for the all-time highs. Although producers are struggling and the major consuming regions outside of China are compensating for softer Chinese imports, the market seems well supplied.

It’s been a powerful move, particularly considering the shaky economic environment we’re in. With each visit to the press conference podium on Capital Hill by Senators and Congressmen from either party to report on progress (or lack thereof) of the debt talks, the markets gyrate violently. It’s a dangerous trade at these levels. For the bold, sell September copper at the market, but don’t risk much beyond the contract highs.

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