Copper prices plunged by over $1.25 per pound, or more than 25%, this past
September. The market has since rallied and is straddling the $3.40-per-pound level. Are we looking at just a dead-cat bounce and soon to see prices revisit the south side of $3.00 per pound, or has the market bottomed?
US economic data on the whole have been fairly positive. Employment data in particular have been better than just about any economist predicted. That should be mitigated by an impending recession in Europe. By and large, however, the copper specific supply and demand indicators have been sliding to the bull side.
Chinese imports – the single most important fundamental in the copper market – have been rising since June. Data for December imports – reported on January 9 – showed imports for the month surging to a record 508,000 tonnes. That surpassed the largest monthly tally recorded in June 2009.
The large numbers have been interpreted as nothing more than arbitrage between LME and Shanghai prices and the financing mechanism used by Chinese businesses to circumvent tight credit conditions orchestrated by the government. Analysts say that industrial demand has been sluggish. Nevertheless, the Chinese are buying, and assuming the trend continues, it takes copper off the market and is certainly not a bearish factor.
Chilean output is anemic, and that is a generous description. Through November, year-over-year average monthly production was down 3.8%. Plagued by constant labor problems, as well as sporadic weather constraints, there were only three months in which output was above previous-year levels.
Warehouse stocks have increased slightly over the past month, but are down substantially since they began to fall earlier this year. Since March, combined LME, COMEX, and Shanghai inventories have fallen by about 125,000 tonnes, to 560,000 tonnes.
According to the International Copper Study Group’s (ICSG) latest data for 2011, which covers the period through the end of the third quarter, global demand was up 1% over the same period in 2010. Consumption in China, the US, the EU, and Japan was down, but strong demand in Russia and India – particularly Russia – compensated to see global demand grow by 1%. At the same time, global mine production was down 1.8%.
The ICSG global balance sheet shows a 170,000-tonne refined-production/supply deficit, which has grown steadily since the summer. The market is in better shape than last year at this time when the balance sheet showed a 429,000-tonne deficit, but with the fragile state of the global economy and the stream of financial problems every region is struggling with, that is a fairly tight balance sheet.
However, the ICSG data for China obviously do not include the powerful recovery in Chinese imports over the past few months. After including apparent demand implied by Chinese buying patterns and the continuation of weak output in Chile, the deficit is surely higher than the ICSG’s dated report.
CFTC data show that commercials remain heavily long this market, which means that commodity funds are still heavily short and are playing the recession card in this and most other markets. At many trading desks it has become somewhat sacrilegious to be bullish, particularly when it comes to markets that should normally be ultra-sensitive to the economic environment.
Some of the bullish indicators cited above are admittedly tentative. One disappointing month of Chinese import data can send the market into a tailspin. Many analysts still have hopes that new production expected to come on line in Chile will soon facilitate a recovery in mine production. Still, the balance of evidence at the moment favors the lonely bull.
Buy March copper, risking $3.30 per pound, close only.
