Copper prices were range-bound during May, despite a number of potentially bullish developments (Chart 1).
First, there was a tragic mining accident in Indonesia. On May 14, 28 workers perished when a tunnel collapsed at Freeport McMoran’s Grasberg mine. The government forced the company to suspend operations pending an investigation to determine the cause of the accident and to institute measures that would prevent a repeat of the calamity.
In and of itself, the amount of copper lost to world trade was not overwhelming. The mine supplies about 0.05% of global output. The initial reaction was muted, but the market rallied back to the high of the range in the week following the accident. It is estimated that the mine will be out of service for three months.
The traditional nemesis of Chilean production, labor unrest, reared its head and had a far more significant effect on global supplies. After a stellar first quarter in which Chilean production rose by 6.6%, year-over-year, it seemed as though estimates for 2013 output, which called for growth of about 3%, would have to be revised. Strikes, however, created a setback, with the most recent data showing April output down 1.2% over last year.
More damaging to the bear case was the most recent reading on Chinese imports. At 358,000 tonnes, May imports were 21% above April and at the highest level in seven months (Chart 2). They were down 14% year-over-year, but the strong showing “messed up” the chart, which has shown a definitive downtrend in Chinese imports. Analysts provided a caveat, however, explaining that the strong showing was on account of backed-up Chilean deliveries that finally showed up.
In any case, the market did not react to the catchy headline that the Chinese data provided and actually sold off sharply on the day the data were released.
Chart 3 shows the combined stocks held in LME, COMEX, and Shanghai exchange warehouses. They’ve come off a bit over the past few weeks, but remain very close to multi-year highs. And that’s not to mention the estimated 500,000-tonne stockpile held in bonded warehouses in China.
The bullish backdrop in both the supply and demand fundamentals for the two arenas that matter most – Chilean output and Chinese usage, as illustrated – have not inspired any strength in prices. Mixed statements from the Fed have caused speculation that a tapering of QE is a possibility. That has sparked a correction in the equity markets and rising interest rates, which seem to have been more influential on copper prices than the tepid bullish fundamentals.
The other base metal markets have been weak as well, most notably nickel, which sank to a four-year low (Chart 4), providing confirmation, perhaps, that global demand for industrial materials has not followed the modest recovery in global economies. The shorts are tired, which neutralizes the threat of short-covering rallies. Chart 5 indicates fairly clearly that funds have covered the lion’s share of their shorts.
July copper came within a smidgeon of our $3.45-per-pound stop, recommended on May 14. We remain steadfastly bearish. Maintain short positions.