The reported deficit developed despite the fact the three major consumption regions outside of China — the U.S., the EU, and Japan — saw usage fall by 4.4% for the period. China’s “apparent” usage overwhelmed that decline with a 13% increase in consumption. It’s referred to as “apparent,” because it is not actually measured in terms of industrial usage, but rather, as ICSG itself points out in its report, is based on import data. As pointed out above, a good deal of Chinese imports end up in bonded warehouses and are not transparent to the market.
An analysis of the open interest shows that there is a lot smoke to trade through. Open interest surged by 40,000 contracts during the November through February rally, or more than 20%. The rally obviously had little to do with fundamentals. The net-fund long position, a domain dominated by technically motivated traders, shot up to the highs of recent years, but just as quickly shifted into a net-short position as the market erased its gains (Chart 5). Nothing in the fundamentals changed rapidly enough to justify the volatility. The market failed to pierce through key resistance levels at $3.85 and $3.95 per pound and that is the technical indicator that counts.
Expect further volatility as funds position themselves for the flavor of the month, but maintain short positions, with our long-standing stop at $3.85 per pound, basis nearest contract, close only.