The Alchemist's  Instablog

A while back I wrote a blog about why the market will pull back, this was when the market was at 10100. Then I wrote another blog about why the market will return above 10,000 early last week. Now, I believe there is a real possibility for a pull back in copper for three reasons.

1: Copper import by China just decreased by 34% (I'm not sure how to link text lol www.bloomberg.com/apps/news), it's inventory is rising. If the only consumer, who for the year has been taking in copper for months

2: BDI has been on the increase. This is a dubious one and not very apparent at first, after all, how could BDI increase be bad for copper? If anything it should be good. The problem is, conventional wisdom says that dry bulks are always destined for China. In reality there is little to stop Chinese investors to ship the other way around, which in turn drives up shipping activities. There was a huge jump in BDI yesterday, even more than usual, and this is right after talks of China may need to re-export their inventories, so one can't help but wonder if this is indeed happening?(www.chinadaily.com.cn/bizchina/2009-11/1...;We won't know right away of course because these shipments won't arrive at their destination quick enough.

3: The nature of copper. Yes we'll always need copper, and infrastructure boom like the one in China is important for copper. While supply is tight (assuming it is) for now, at some point China will stop building new buildings at such rapid speed and merely maintain and upgrade, much like the U.S now, which will ultimately reduce demand. Of course, this won't happen for at least a decade if not more, but one can't help but wonder what happens to copper in the very long term (since the sentiment is that copper is bullish in the medium to long term, despite the current slump). More over, more than 80% of the copper ever mined is still in use, because copper is recyclable (and is frequently stolen for just this purpose), and as prices goes up and up, one might wonder just how big an impact scraps will have.

All this is assuming that supply is tight, which it isn't, as can be seen by the LME stock approaching 400,000, almost twice the level before last year's meltdown, signal comfortable supply margins. One tend to forget that while China has been the undisputed driver of copper demand, there was competing demand from much of the world as well. Until new housing constructions come back, which it won't, since there's still a lot of empty inventories sitting out there, as can be seen from the latest new housing report disappointment despite the increased sales in existing homes. The problem is that existing homes do little to improve copper demands, and new houses are not being sold. Yes, the housing credit has been extended, but the feds have admitted that people are not buying new homes or upgrading, they're scooping up foreclosures. It is hard to imagine people who have lost homes will be able to afford new houses anytime soon (Especially for those unemployed), so the housing credit is probably enticing future home buyers to buy now, meaning less buyers in the future for new houses, and new constructions will struggle for quite sometime into the future. What's that saying again? The housing sector is the foundation of an economy? I would like to see how long the recovery lasts without a foundation, and George Soros would too (online.wsj.com/article/BT-CO-20091015-71...), and this was the guy who broke the bank of England (ironically, England is still in the recession, but one wonder if anyone has really emerged).


Disclosure: I own shorts in Teck Cominco (TCK.B), a mining company.