Copper prices have dropped substantially since the beginning of the year, failing at the $4-per-pound level and sliding all the way down to $3.25 per pound. In early June, the market found support at about the same time that the stock market bottomed (Chart 1). We’ve been bearish, but our trading has been a bit sloppy. Our April 24, $3.75-per-pound stop was triggered just ahead of the May selloff.
According to the International Copper Study Group (ICSG), the global balance sheet for refined copper has been building a deficit since the beginning of the year. Through the end of April, the deficit stands at 384,000 tonnes, sharply higher than in the same period a year earlier, when the market was in near balance with a deficit of only 26,000 tonnes.
Although the global economy has been sluggish, the deficit was generated by improved demand. During the ICSG’s study period, usage of refined copper grew by 10% over a year earlier, while total refined production rose by just 4.4%.
ICSG data are dated, though, and are a reflection of the tail-end of the recovery, which has since sputtered. More current statistics indicate that the key drivers of the global copper market have turned bearish, for both the supply and demand sides.
Chilean output for 2011 was 3.2% lower than in 2010. So far this year, average monthly output is up 1.18%, but the trend may be moving towards more significant production growth. In the second quarter, average monthly output was 3.6% above the same period in 2011. Estimates for 2012 call for growth of between 6% and 10%. If the current trend can continue even while being affected by the ever-present issues that hamper Chilean mining, such as weather and labor strife, those estimates are achievable.
Chinese imports – the single most important factor in the copper bull market – have been in decline. Imports reached a monthly record in December of last year, but have been trending down since (Chart 2).
To put this in perspective, although month-over-month numbers are falling, imports are still above year-ago levels. While the drop-off in imports seems to be consistent with the slowdown in the growth rate of the Chinese economy, imports are still substantial. June imports of refined copper were 250,000 tonnes, 40% higher than in June 2011. Each month’s data will have to be scrutinized.
Global warehouse stocks peaked in mid-2010 and have been falling since. Inventories began to rise a bit in June (Chart 3), however, which might prove to be consistent with weaker Chinese imports and increased supply coming out of Chile.
In conclusion, if the two principal fundamental factors that guide this market – Chilean production and Chinese imports – continue to develop in the direction they’ve been moving over the past several months, even a strong US stock market will not be able to keep copper prices above $3 per pound. The Chinese market has proven to be resilient, however, and Chilean output growth has many challenges to deal with. If you were fortunate enough not to abide by our stop and are still short, remain short, but lower stops to $3.56 per pound, basis September, close only. Otherwise remain sidelined, but stay tuned.