Copper prices continue to bounce back and forth within the confines of a relatively narrow range, seeking direction (Chart 1). Production growth has been strong, but demand has been as well – mainly in China, where it counts.
In September, Chinese imports spiked to a 19-month high. The recently-released data for October show that the buying cooled down a bit, with imports falling 11.2% from the previous month. Nevertheless, the average of the past the few months remains near the level of the frenzied buying days of late 2011. Chart 2 (which does not include the drop in October) shows the robust import activity that began in May.
Bonded warehouse stocks have increased a bit over the past two months, but, at an estimated 350,000 tonnes, they are still down sharply from their peak, which reportedly reached 1 million tonnes earlier this year. Official data is not necessarily the most reliable in the world. However, if the general trend of increasing imports and declining stocks is at least somewhat accurate, we can make the assumption that copper, as well as the other base metals, whose prices have been strong, are being utilized for bona fide industrial purposes.
Production growth in Chile has been somewhat disappointing in recent years, but this year has been different. Despite declining ore grades and labor issues, output has exceeded expectations. Through the end of September, Chilean output has grown 6.3% over the same period in 2012. That’s a stronger pace than the 5% growth forecast earlier this year.
One contributing factor to Chile’s production boom has been the return to health of Collahuasi, the world’s third largest mine. In 2012 the mine was plagued by all the traditional Chilean mining industry problems such as ore grades, labor strife, and inclement weather, in addition to accidents which saw out fall by 37%.
China is now the world’s second largest copper miner. Year-to-date output is up 15.2%. While its production is still dwarfed by Chile’s, it is a contributing factor to growing world supplies. At the moment, however, the fact that China is still importing copper attests to the reality that demand in China remains strong.
According to the most recent International Copper Study Group (ICSG) report, which covers the period between January and July, the global balance sheet posted a 150,000-tonne deficit in July, bring the year-to-date balance to a 93,000-tonne deficit. As recently as the end of April the market was showing a 266,000-tonne surplus.
Global exchange-warehouse statistics also confirm that the market is tightening. Chart 3 shows the combined inventories at LME, COMEX, and Shanghai warehouses have declined by 240,000 tonnes since June.
The lackluster directionless trade we’ve been witnessing reflects the relative balance between the supply and demand sides. We are cautiously bullish because Chinese buying can overwhelm any influx of supply – should its importing habits be maintained.
We recommend using the recent swing to the low end of the multi-month range to establish long positions. Buy March copper and place initial stops at 315, close only.