Not only have copper prices not kept up with the move in equities, they’ve headed in the opposite direction (Charts 1 & 2). Not surprising. Developments for just about all areas of copper fundamentals we follow have been bearish.
Chilean output for 2012 was 3% higher than the previous year — for the most part, a disappointment. Early forecasts for production growth of between 5% and 10% did not materialize. This year’s early forecast calls for 3% growth in 2013. The first reading of the year certainly made that estimate look conservative. Output for January was 8.6% higher than last year. Mining of higher ore grade and newer mines starting to realize capacity were reasons cited for the large jump. Both of which would augur well for continuing improved output growth.
The most recent reading on Chinese imports was dismal (Chart 3). February imports were down 15.1% from January and 38.5% below February 2012. It was the smallest monthly import figure since June 2011. China is by far the largest consumer of copper in the world. Monthly Chinese imports have been in a downtrend since late 2011, and if that trend were to continue, the implied drop in Chinese usage alone could bring prices down with a thud.
Global inventories have increased significantly since they bottomed last fall. Combined LME, COMEX, and Shanghai warehouse stocks have nearly doubled, to 762,000 tonnes, during this period (Chart 4). That does not tell the whole story, though. Stocks in Chinese bonded warehouses, which are not included in exchange warehouse figures, are rumored to have doubled over the past year to 1 million tonnes.
The International Copper Study Group’s (ICSG) Feb. 20 report covers the period from January through November 2012. According to ICSG, the global balance sheet remains in a massive deficit of 513,000 tonnes, which compares with a much smaller deficit of 260,000 tonnes the previous year. ICSG data are always dated by three months, but the most recent trend in the ICSG data itself — October and November were both surplus months — as well as more up-to-date statistics, would seem to indicate that a deficit of that size is not nearly an accurate reflection of the realities of the copper market
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.