By Stuart Burns
In the midst of CESCO Conference Week in Santiago, Chile, a potentially crippling strike spreading from miners to port workers threatens to cut supplies from the world’s largest producer.
The strike has so far said to have restricted copper exports by up to 60 percent, pushing up physical delivery premiums in Asia as the market adjusts to the possibility that Codelco and others could have delivery problems if an early resolution is not found.
Even so, the copper price on the London Metal Exchange has risen only 0.7 percent to US $7,442 per metric ton, having hit an eight-month low of $7,331.25 late last week. The reality is that in spite of Chile’s strike, copper is a market in oversupply.
According to the FT, copper inventories on the LME have risen to their highest level since 2003, with copper stocks rising 165 percent since just October amid an increase in global mine production and slower purchases from China.
On Thursday of last week, stocks on the LME rose 6,625 tons to 557,450 – the highest since October 2003, as mine oversupply fed into a weak demand market. Debt and solvency problems in Europe have hit sentiment, and the Eurozone’s rate of decline in output accelerated for the second month in a row in March; but it’s rising inventories that have been the most bearish influence of late.
According to data on US contracts from the Commodity Futures Trading Commission (CFTC), investor positioning is the most bearish since 2009, and even Barclays, traditionally one of the most bullish banks on commodity prices, is quoted by the FT as saying that the rise in supply marked the “end of an era for the copper bulls.”
So Now What?
No doubt inventories and prices will be much in discussion this week at Cesco, and expect further comments and reports to come out over coming days, but one fact remains: almost all copper mines remain profitable at current prices; if oversupply continues, prices probably have only one direction to go.
Much focus will be on those inventory levels as an indicator of how the balance is playing out. Interestingly, stocks in warehouses around Shanghai, closely watched by the market as an indicator of China’s need for copper, according to a separate FT article, have fallen by some 50,000-100,000 metric tons in recent weeks.
Furthermore, the falling LME price of copper has made it profitable to buy copper on the exchange and import it to China for the first time since 2011. China accounts for 40 percent of global copper demand and recent sentiment indicators point towards an improvement in activity in China.
Extrapolating the recent falls in Shanghai inventory and the opening of the arbitrage window on LME/SHFE copper price, it is possible Chinese buyers coming into the market could upset all those bears. Certainly for copper buyers, Shanghai inventory, Chinese copper imports and Asian physical delivery premiums are key indicators to watch – unless you are comfortably covered with set prices for the year.