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I recently
opined on the long-term bullish fundamentals of the copper market (Mercenary
Musing, May 28, 2011). Despite a promise to follow up
immediately with a short-term commentary, a 24-day sojourn back and forth
across North America forced a delay. However, I had time to decipher
equivocal market signals and recent supply and demand trends. Four weeks
after the fact, I present my views on the short-term fundamentals of Dr.
Copper.
The chart
below displays copper’s strength over the past year. After a long
overdue 30% correction of the unsustainable +$4.00 price in late August to early
October 2011, it settled into what I viewed as a very comfortable range of
$3.50-$4.00/lb. With May’s economic concerns about European debt and
the slowing of Chinese growth, copper’s price dropped into a lower
range of $3.30-$3.50/lb for the past six weeks:
Chinese
imports have been robust this entire year and copper’s continuing
strength is reflected by LME warehouse stocks, which in late May dropped to
their lowest levels since late 2008 and remain quite low:
Low surplus
inventories are also shown by a two and a half-year low in Comex stocks and a 40% reduction in Shanghai warehouses
since a nine and a half year-high was reached on
March 15. The three official global stockpiles of surplus copper now total
446,000 tonnes, equivalent to less than eight days
of world consumption.
The copper
market also exhibited an extremely high ratio of LME cancelled warrants to
total warehoused stocks until the recent price volatility set in. Uneasiness
was reflected by the steep parabolic rise and fall of cancelled warrants from
early April to early June but they have rebounded to more normal levels over
the past three weeks:
Copper has
been trading in backwardation or nearly so on both the one month and three month
futures contracts for the past several weeks. This scenario is generally
indicative of immediate tight supply and is a bullish signal for the
short-term price. Recent strong backwardation at the front end of the LME
curve continues to discourage shorts and could generate near-term short
covering.
Here are Comex closing prices on Friday June 29:
·
Copper spot price:
$3.5159
·
One month contract: $3.4860
·
Three
month contract: $3.4930
Alternatively,
the current backwardation could be viewed as market bearishness on near-term
future demand as European economic worries and China’s economic growth
slows and turns from infrastructure build-out to domestic consumerism.
The Baltic
Dry Index (BDI) measures current rates to ship bulk dry materials and is a
key metric for intercontinental economic activity and demand for industrial
commodities. The one-year chart shows high shipping rates during the last
half of 2011 and a precipitous drop at the beginning of 2012 as demand slowed
prior to the Chinese New Year. Rates have since rebounded but remain low and
relatively stable. I view the indicator as neutral to bearish at this time.
Supporting
the bullish case, Chinese policy makers have indicated they will stimulate
the economy again thru monetary policy and credit incentives, which should
bolster GDP growth and lead to a soft landing.
According to
recent statistics from China Nonferrous Metals Industry Association, copper
concentrate and refinery output are up significantly year over year at almost
9% and over 14% respectively. In addition, we are now in construction season
in the Northern Hemisphere when copper demand typically is strong.
The wild card
in the copper market is China. Western World analysts do not have a
transparent view of copper except for Shanghai Exchange warehouse inventories
and government data on monthly imports, concentrates, and refinery output. In
addition to unknown stockpiles held by the State Reserve Bureau, independent
speculators, including the proverbial pig farmers, commonly hoard and dispose
of significant copper stocks outside of official government channels. These
shadowy movements of physical copper are subject to rumor and innuendo.
Because of this, short-term data and informed opinions on the copper market
can be compromised by the opaque goings-on in China.
A potential
game-changing development in the copper futures market has loomed for nearly two
years. JP Morgan filed a prospectus to list a physical copper ETF on the New
York Stock Exchange in early June. There are widespread industry concerns
that removing a significant amount of LME warehouse inventories from world
trading markets could drastically inflate copper prices, exacerbating already
tight supplies, and causing global turmoil for this vital economic commodity.
Recently a major US copper consumer and a hedge fund trader filed objections
to the proposed listing with the SEC. It now appears the proposed copper ETF
will be put on hold, at least for the short-term.
It is my
opinion that regardless of Europe’s never-ending debt problems and the
United States’ slow GDP growth, the copper market appears tight to balanced for the short-term. Therefore,
I expect its price to be range-bound near current levels. If it happens to
re-test or drop below the spiky $3.05 bottoms in the fall of 2011, high-cost
production will come off, Chinese speculators are likely to buy en masse, and
I would expect a rapid rebound.
The data and
charts reflect China’s 36% of world consumption and its dominance of
global copper markets. It is apparent to me that as goes China, so goes Dr.
Copper. If its economy does indeed take an immediate hard landing predicted
by some analysts, you can just kick my platform out the door.
However, I
prefer to take the contrarian view that this scenario is not going to happen
anytime soon.
To learn more
of my views on the global copper market, please watch this recent clip from
BNN’s Commodities with Andy Bell: Copper Outlook.
Ciao for now,
Mickey
Fulp
The
Mercenary Geologist
Miningcompanyreport.com
The Mercenary Geologist Michael S. “Mickey” Fulp is a
Certified Professional Geologist with a B.Sc. Earth Sciences with honor from
the University of Tulsa, and M.Sc. Geology from the University of New Mexico.
Mickey has 30 years experience as an exploration geologist searching for
economic deposits of base and precious metals, industrial minerals, coal,
uranium, and water in North and South America and China.
Mickey has worked for junior explorers, major mining companies, private
companies, and investors as a consulting economic geologist for the past 22
years, specializing in geological mapping and property evaluation. In
addition to Mickey’s professional credentials and experience, he is
high-altitude proficient and is bilingual in English and Spanish. From 2003
to 2006, Mickey made four outcrop ore discoveries in Peru, Nevada, Chile, and
British Columbia.
Mickey is well known throughout the mining and exploration community for his
ongoing work as an analyst for public and private companies, investment
funds, newsletter and website writers, private investors, and brokers.
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