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Albert Sung is the author of the Katchum Macro-Economic Blog, monitoring breaking economic news from a day to day basis. He started investing in 2008 because of the economic crisis and holds a masters degree in chemical engineering. Previously, he worked several years as a process engineer at... More
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  • Copper Contango Update 0 comments
    Dec 27, 2012 4:40 AM

    This week, the copper contango remained high, but the copper price fell. So I still expect the copper price to go higher as we move to backwardation. The copper contango theory will not be wrong.

    As I write this post, I see the copper price go up from $3.53/lb to $3.59/lb.

    The next step to extend this copper contango theory is to identify the tops and the bottoms of the contango. What are the upper limits of contango and lower limits of the backwardation?

    (click to enlarge)

    Chart 1a: Copper Contango Vs. Copper Price

    If we quickly look at history, we can see that in 1988, we got a price of $1/lb copper and a backwardation of around $0.2/lb. That's 20%. If we then look at another data point in 1996, we got a price of $1.25/lb and a backwardation of around $0.1/lb. That's 8%. Similarly, in 2006 we got 7%. For contango we have 13% in 1982, 7% in 1993, 2% in 2008.

    So as far as major backwardation lows, we have a range between 7% and 20% and 2% to 13% for major contango highs.

    Today we are at 0.6% (0.02/3.6) (mild contango), so we are neither in a low or a high range. We are now right in the middle between contango and backwardation, with a small bias to contango. So, to be really sure we have found a bottom in the copper price, the contango to price ratio should go to at least 2%. But when we go back to backwardation like in 1988, 1995 and 2006, the copper price should spike upwards.

    Chart 1b: Historical Copper contango

    There is one caution however, the LME copper stock levels are surging in exchange warehouses, which will put a cap on the rise in copper price and may even bring the copper price down.

    (click to enlarge)

    Chart 2: LME Copper Stock

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