China's Copper Stockpiling Screeches to a Halt

Includes: FXI, JJCTF
by: The Sovereign Society

The trend in copper might be bullish as prices border $3 per pound amid a race to the moon since earlier this year. China, more than any other consuming nation this decade, is largely responsible for driving the primary trend in copper prices as she builds her rapidly growing domestic infrastructure.

But the fundamental picture for Dr. Copper is growing more bearish by the day as the Chinese have completed recent stockpiling for this cycle…

Copper is widely viewed as a forward leading indicator.

Copper prices can generally decipher the health of the global economy, as it is one of the leading commodity inputs for global manufacturing and infrastructure development. So goes copper, so goes the global economy.

According to Galtere International, one of the leading commodity trading funds, in the 2000s, Chinese copper imports mushroomed to 51,135 tons at the end of July compared with stockpiles of 17,822 at the beginning of 2009. In August, however, China’s copper imports dropped for the first time in six months to 406,612 metric tons – a 15% decline from a record 477,217 tons in June. This strongly suggests that copper’s recent extended gains are living on borrowed time.

Similar stockpiling trends are also evident in aluminum.

Prices for the metal have also rallied sharply lately despite inventory accumulation already baked into prices.

Copper and other base metals have already enjoyed a huge rally off their lows earlier this year and should be selectively shorted for aggressive-risk investors. The speculation in this sector is running wild, particularly in copper.

If the Chinese have already terminated the bulk of hoarding or stockpiling this year – at lower prices – the there’s only one direction left for prices once speculators are left holding the bag.

Oil is another enigma…

Crude oil prices have more than doubled off their February lows even though Chinese oil demand declined 0.23% the first six months of 2009. In the United States, oil demand has declined sharply compared to 6 and 12 months ago as companies shutter, boost layoffs and aggressively cut costs.

Global oil consumption has dropped sharply since mid-2008 in response to the global economic crisis. Preliminary data indicates that global oil consumption declined by 3.1 million barrels per day (bbl/d) in the first half of 2009 compared with year-earlier levels. OECD countries accounted for 2.8 million bbl/d of the overall decline while non-OECD consumption recorded a decline of only 300,000 bbl/d. The trend here is less consumption, yet oil prices have surged 124% since late February.

The EIA (Energy Information Administration) expects world oil consumption to grow year-over-year in the fourth quarter of 2009 -- the first increase in demand in five quarters. Overall, global oil consumption is projected to decline by 1.7 million bbl/d in 2009 followed by a rise of 940,000 bbl/d in 2010.

Some commodities are now in a “bubble” (copper, oil) while others (grains, natural gas) are big bargains.

The best speculation at these levels would be to sell copper and oil and buy distressed natural gas and the grains. Natural gas is probably the cheapest of all commodities at these bombed-out levels after crashing again this month; the crude oil-to-natural gas ratio now stands at a lofty 26.4 – the highest levels in years and up from 18.2 on June 30.