by Stuart Burns
Copper prices have been drifting for the last month, rising or falling no more than $200 either side of a $9,000 per ton mean. Most of the impetus for copper price fluctuations has been taken from equities, as the stock markets have rallied on crumbs of good news that the copper price has managed a small rally. As equities have fallen on the back of (mostly debt-related) risk aversion, the copper price has slipped back.
Last week Reuters reported the markets were looking for positive news in President Obama’s speech to lift sentiment; it didn’t happen, and the copper price has dropped back below $9,000 per ton again. Even strikes aren’t having any impact. Workers launched a two-day strike at Freeport McMoRan's (FCX) Cerro Verde mine in Peru, which is said to produce around 2 percent of the world’s copper, with no impact on the copper price. Nor has the impending strike at the firm’s Grasberg mine in Indonesia, initially set to run for a month from Sept. 15.
It’s not that investors don’t believe the fundamentals, it’s just they are not sure the China bull story is still valid. Fear that there are massive hidden stocks capable of bombing the market have largely been discounted by Reuters reporter Andy Home in an article analyzing CRU data gathered on global copper stocks.
Hidden Copper Stocks: Ins and Outs
When stock held in the supply chain (at producers’ stores, in transit and held as inventory by consumers) is deducted from global estimates, when ETF and exchange-traded stocks are discounted, a fairly accurate guess of the hidden stocks held in China and by investors can be ascertained. Home’s estimate is that rather than massive hidden stocks, the market is in fact relatively balanced. When material flows out of Shanghai’s bonded stocks and are exported into Asia or turn up at LME Asian warehouses, they are reflecting the swing in the LME/SFE arbitrage window more than a dangerously oversupplied market. When LME prices have dropped, the Chinese have been back in the market buying on what they see as dips. Anything around $8,750 per ton appears to be the current low point — every time prices fall towards that level, buying picks up and prices rebound. Unless there is a sudden rise in the fear factor, this is likely to be the new floor.
Investors elsewhere are pretty neutral on copper. In a note to investors, Standard Bank observed this week that open interest is largely neutral. As a percentage, net speculative length is just 3 percent, well below the average over the last two years of 12 percent. This suggests investors are, for the time being, sanguine about the copper price, but the trend has definitely been bearish this summer and open interest could turn short if economic conditions worsen.
Going forward, the key indicators are macro issues like the European debt crisis, US government spending plans, equities and the strength of the US dollar. At a more tactical level, changes in the net inflow/outflow of copper imports/exports is a good indication of the strength of domestic Chinese demand, open interest in the short/long position of investors and the LME/SFE arbitrage window, both of which we will endeavor to keep you advised on in subsequent posts.