China continues to be the world’s largest importer and consumer of copper, but imports are in a downtrend. April imports were 7.4% below the previous month and were at their lowest level in 22 months. Import volumes have fallen by roughly 40% from their late-2011 peak. Naturally, even with some countries slowly recovering from the global economic crisis of the past several years, there are no countries or regions that can compensate for the sheer magnitude of Chinese overseas purchases.
Rising energy and labor costs worldwide have driven production costs up over the past few years, but copper prices remain well above the cost of production. Costs vary from mine to mine and from region to region. The costs we surveyed averaged between $1.50 and $2 per pound. Still, it is a very profitable business, and where unimpeded by weather and labor problems, mining companies will produce as much as they can. With Chinese buying possibly in for a long-term decline, global demand may not be sufficient to sop up excess production.
A study of open interest and CFTC commitment of trader data confirm that commodity funds were heavily short and probably were a strong contributing factor to the sharp decline in prices that began in early February, bearish fundamentals notwithstanding. During the recent rally, open interest dropped sharply and the net-short position was trimmed by more than 20,000 contracts.
We believe that this rally warrants establishing new short positions or adding to existing ones. Lower our long-standing buy stop at $3.85 per pound, basis nearest active contract, to $3.45.