The copper bull’s last hurrah

Copper prices fell to a two-year low earlier this month. The other London-traded base metals followed a similar pattern. In what we view as merely extremely oversold conditions, copper staged a mighty 10% rally. The other metals consolidated but continued to hover near their lows. An indication, perhaps, that the recovery in copper prices was tied more to short covering than a resurgence in demand for industrial metals. Indeed, we find that the supply/demand situation for copper continues to head in a bearish direction.

On May 1, The International Copper Study Group (ICSG) released its most recent report, which showed that the global balance sheet posted a 67,000 tonne surplus for January. Although 2012 ended with a 396,000-tonne deficit, that shortfall contracted sharply over the past few months – by more than 100,000 tonnes. And it would seem from recent developments that this will continue. ICSG estimates that 2013 will end with a surplus of 415,000 tonnes, the first time the market will be in surplus since  2009.

Chilean copper output grew by 3% in 2012, below initial optimistic estimates. Thus far in 2013, however, forecasts for output growth of between 5% and 10% appear to be achievable. Despite a sluggish February, in which output grew only 2.8%, and ongoing labor strife, average monthly output is up 6.5% versus the same period last year.

Warehouse stocks continue to build. At just under 900,000 tonnes, combined inventories at LME, COMEX, and Shanghai warehouses have more than doubled over the past year. And that is on top of the 500,000-tonne-plus stockpile rumored to be held at bonded warehouses in China.

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