By James Attwood –
Warehouse supply low: Stockpiling rumour ‘completely mad,’ producers say
Despite murmurings of an impending swoon, copper is widely expected to keep defying physical supply-demand logic by staying around record levels in the coming weeks.
The flagship base metal surprised many by rallying to a record US$3,435 a metric ton on the London Metal Exchange in mid-June, after dipping below US$3,000 in May. Since then, prices have slipped but most analysts and traders are leaning toward further gains in the near term.
Even as producers increase output and global demand growth comes off the boil, the collective inventory of warehouses in London, New York and Shanghai has shrunk to its lowest level in decades, with no sign of an immediate turnaround. These critically low warehouse stocks are keeping prices stronger for longer than many expected and may provide the setting for new highs in the coming weeks, market-watchers say.
“In the short-term, there are no signs of global inventories turning around at all,” says Robert Rennie, chief currency strategist at Australia’s Westpac Banking. “If anything, the risks are on the top side.”
China’s voracious appetite for commodities in general is a key factor bolstering copper, with recent data indicating China’s copper imports and consumption generally should remain strong, he says. In addition, the Shanghai Futures Exchange has been something of a price maker in recent sessions, largely shrugging off downside pressure from the LME and the Comex division of the New York Mercantile Exchange in mid-June.
Shen Haihua, an analyst with Southwest Futures Shanghai, says global market tightness means going short on the Shanghai exchange is too risky for the time being, even as physical supplies rise. And the perceived risks, according to several analysts, are being exacerbated by rumours that hedge funds, producers or both are withholding stock.
David Thurtell, a commodity strategist with the Commonwealth Bank of Australia, agrees the divergence between barrel-scraping warehouse stocks and seemingly plentiful physical supplies does seem suspicious.
“There are questions about some big party holding a lot of metal off warrant to play some games and try to make some money,” Mr. Thurtell says.
Major producers Xstrata and BHP Billiton deny stockpiling, saying their policy is to operate at the lowest levels possible. The rumours are “completely mad” in the current price environment, says a BHP Billiton spokesman. Nevertheless, sentiment is key while inventories are so tight, analysts agree, pointing to recent market-moving mine closures in Peru and Chile.
A slightly weaker U.S. dollar could be another factor supporting continued strength in copper prices over the next few weeks, while copper’s chart patterns too remain supportive, as long as LME prices hold June 23’s $3,257.50 low.
Not everyone agrees with the positive short-term picture. Rising physical supplies and signs global demand is waning have some saying current prices are unsustainable even in the short term and the bubble may be about to burst. “Odds are high that the hedge-fund-inspired short squeeze on the LME will at some point result in a short, sharp decline,” says Craig Ferguson, senior currency strategist at Australia & New Zealand Banking Group.
The catalysts for such a decline, perhaps in the next two-to-three weeks, could be a 5% fall in U.S. equity markets or oil hitting US$65 a barrel, he says, adding, “copper never does anything gradually.”
Most analysts and traders, however, say inventories are just too tight for prices to tank right now, although further volatility is assured.
One thing market watchers do agree on is prices will begin a long-term downtrend once the market goes back into surplus sometime late next quarter or early in the fourth quarter.
Daniel Hynes, natural-resources analyst at Australia’s ANZ Bank, expects copper to end the year 10% to 15% lower than current levels, while Ferguson and ABN Amro analyst Nick Moore forecast a 30% decline.
Source: Barron’s via the National Post