Copper prices are bleeding. The red metal is one of the worst performers of a widely affected commodity spectrum. The fall in prices could be easily attributed to a supply glut, as copper inventories at LME warehouses are now above their 2009 peak. In addition, new mine capacity may be starting to materialize, which could invert a decade-long supply deficit.
Yet, as can be seen in the chart below, cancelled warrants (copper earmarked for delivery) are also on the rise, which is contradictory:
- Either it is a bearish signal: higher inventories coupled with a low level of cancelled warrants; or
- It is a bullish signal: higher cancelled warrants and lower stocks.
Interestingly enough, higher cancelled warrants used to come along with stronger copper imports from China, which is not the case this time. In the meantime, the acceleration of the decline in copper prices over the recent weeks can be attributable to weaker-than-expected data from China. The chart below shows that the link between copper prices and the state of the Chinese economy has strengthened after a year of mixed messages.
Is the combination of weaker China growth coupled with high inventories a bearish signal for copper?
A glimpse at the chart below shows that net long positions on copper futures contracts have significantly increased over the last few weeks. As can be seen, the reversal in positioning generally leads the rebound in prices by a few weeks.
In addition, the restocking period can take several months and is generally followed by price increase. The chart below shows the inverted relationship between the peak in global inventories and the trough in copper prices.
Some of the weakness in Chinese imports of copper has been due to destocking from unrecorded inventories after the huge accumulation of inventories early last year. Some is due to a rise in copper smelting capacity (importing more concentrates rather than finished metal).
The physical premium on the copper market also sends a significant signal. The physical premium is the premium charged for physical delivery of the metal, namely what buyers are ready to pay in excess for delivery to a specified point. The chart below shows the sharp increase of the physical premium in Shanghai, and suggests that there should be a profitable arbitrage for Chinese importers.
As the "import arbitrage window" is open, it could easily create a floor for copper prices.
Therefore, in spite of signs of weak growth in China and the surge in inventories, many early signals are suggesting that copper prices may be about to rise in the short run. I will consider getting long JJC in the next few weeks.