Base metals have been rallying with the equity markets since this past fall. We constructed a bullish case for copper (Focus on Futures, January 10) rooted in the apparent supply/demand fundamentals. An examination of developments in the copper market shows that not much has changed over the past several months.
Chinese copper imports for January fell sharply from December (see “China copper imports”). The headlines focused on the fact that it was the first month-over-month drop since last May. Being that December was a record month for imports and November was a near-record, topping or meeting those levels would have been a hard act to follow in January. At 335,000 tonnes we were still looking at very strong imports, which were much higher than all but the last two months of 2011. In addition, and perhaps most significantly, total imports were higher year-over-year from last January.
Whatever bearish news one wants to take away from the constant barrage of data showing that the Chinese economy is growing at a slower pace than in recent years, it has not appeared in their copper-restocking activity. Shanghai warehouse stocks have been rising sharply since November (see “Shanghai copper warehouse stocks”), and that has been cited by analysts as proof that the imported metal is not finding its way to end users. Perhaps, for now.
However, the drop in LME stocks has been about the same as the increase in Shanghai stocks. “Global copper warehouse stocks” shows that the net change in global warehouse stocks has actually been falling during this period.
According to the International Copper Study Group’s most recent balance sheet, the global deficit stands at 382,000 tonnes. The report is dated, as it covers the period between January and November 2011, but when plugging in more timely data, we are likely to find that the deficit continued to grow. Chinese imports have increased, as illustrated above, and production remains soft.
Chile produces roughly one third of the world’s copper. Sporadic problems such as labor strife and inclement weather have restricted production growth. In addition falling ore grades at existing projects limit output potential. Output in December was up 2.2%, but down 7.6% in January. For the year, Chilean production was down 3.2%, which is a disappointment in terms of early-year forecasts.
There are mega-projects that are expected to come on line in Chile over the next couple of years, and that is certainly a bearish factor down the road. In the interim, though, the spurt of Chinese imports over the past few months was a surprise to the market against a backdrop of a perceived stagnant economic environment.
The vulnerability to a correction in the US stock market became evident in early March when copper – and indeed the other base metals – tumbled when equities experienced their first meaningful pullback since last year.
CFTC data show that speculation has definitely had a large influence in this rally. The fund net-long position has been growing and is the largest it’s been since August. This little selloff we’re in at present has shed some open interest, but only a fraction of the run-up. We could be in for some more selling. Still, we like the bullish fundamental case, so our recommendation is to raise the current stop to $3.65 per pound from $3.30 per pound, basis May close only.