The recent rally in copper prices could appear to reflect bullish developments in supply/demand fundamentals (Chart 1). The International Copper Study Group’s (ICSG) most recent data show that the global refined copper deficit at the end of the first half of 2012 had grown to 473,000 tonnes. A closer look, however, might cast some doubt on such optimism.
First, after lagging in its traditional relationship with the stock market for most of 2012 (Chart 2), copper prices had some catch-up to do. With the Dow Jones Industrial Average at five-year highs, it was inevitable not to associate the powerful equity market with a stronger economy down the road, and ultimately, improved demand for copper and other industrial commodities.
ISCG data are dated by three months, though, and at least some more current supply-side data would indicate that the market is not nearly as tight as the headline statistics portray. In its forecast for the balance of 2012, ICSG itself estimates that the deficit will moderate somewhat by year-end, down to 400,000 tonnes, and that in 2013 the market will flip completely to the other side with a surplus of 458,000 tonnes!
For the first time in ever so long, Chilean output has strung together a fairly decent stretch of robust monthly output figures.
Production for 2011 was 3.2% below the previous year. Earlier this year it seemed that the two restrictive forces that hampered increased output – labor strife and dwindling high-grade ore – would continue to keep a lid on growth. Output shrank 1.2% in the first quarter, but then grew 3.6% in the second quarter. June and July averaged an increase of 8.8%. Average monthly output for the year so far is 3.08%. That is far shy of original forecasts that put output growth at 6% to 10% for 2012. But if the pace remains steady, those levels – with four months of reporting remaining – are still achievable.
Chinese imports for September were strong – 11% above August and 3.6% higher, year-over year. As Chart 3 illustrates fairly clearly, however, total imports are still in a downtrend and nowhere close to the levels that were indicative of the urgent Chinese buying that drove prices. With softer economic growth rates in China, it is difficult to expect a return to an environment in which the Chinese will not be price conscious.
Combined LME, COMEX, and Shanghai exchange warehouse stocks have been falling since 2010, but have been inching up over the past few months (Chart 4). These inventories do not include the off-exchange stockpiles that have been accumulated in China and are locked up in financing deals, rumored to be as large as 600,000 tonnes.
Perhaps the greatest evidence that the rally in copper was powered by a speculative flurry rather a shift in fundamentals is found in an examination of the open interest. The 20,000-contract increase in open interest to the 155,000-contract level in itself was not that extraordinary – it was higher earlier in the year (Chart 5).
The net-position of commodity funds, however, swung around dramatically, from a large net-short of about 13,000 contracts, to a huge net-long position of about 24,000 contracts in the space of just a few weeks (Chart 6). That is a bit unusual.
Moreover, the lion’s share of the rally happened in just a few days, but prices have stagnated since and have drifted lower even while open interest continued to build, proof that a good deal of the buying was inspired by nothing more than a bullish-looking chart.
We were stopped out of our short position at $3.56 per pound, basis December, as per our August 2 recommendation. The rally has now run its course. Sell December copper, placing initial stops at $3.85 per pound, close only.