LONDON (Reuters) - Here we go again on the London Metal Exchange (LME) copper stocks roller coaster.
Headline LME inventory jumped 46 percent to 304,350 tonnes over the course of last week.
Live on-warrant inventory surged by 87 percent to 217,500 tonnes, a level last seen in July.
Which is when the previous LME stocks surge took place.
Last week’s inflow was, in fact, the fifth copper “arrivals event” on the exchange in the space of a year.
The London market is getting used to this long-running tug-of-war between two of the market’s bigger players.
The most recent influx of metal, however, seems to have had greater impact on pricing, both in terms of outright three-month price and time-spreads.
(Graphic on LME copper stocks, click tmsnrt.rs/2xKMQ3g)
Deliveries of copper onto LME warrant last week totaled 108,175 tonnes with the inflow concentrated on Rotterdam (37,875 tonnes), Busan in South Korea (34,925 tonnes), Port Klang in Malaysia (15,850 tonnes) and Kaohsiung in Taiwan (11,800 tonnes).
All four ports featured equally heavily in the previous “arrivals events” in December last year (152,900 tonnes), March (141,625 tonnes), May (126,150 tonnes) and July (86,950 tonnes).
In truth, although the LME community speaks in terms of “arrivals”, it is highly unlikely any of this metal arrived from anywhere other than non-exchange warehouses in the four ports.
These sudden inflows have been part of a battle for supremacy between major physical players with opposing views of the market.
The bull has been on the ascendancy thanks to copper’s stellar price run to a three-year high of $6,970 per tonne this month. The bear has reacted by delivering physical metal.
If the usual suspects stick with their usual strategies, what happens next is the mass cancellation of the newly “arrived” metal and its gradual load-out from the LME system over the coming weeks.
This morning’s report shows all the signs of the expected pattern with no new “arrivals” but 13,700 tonnes of net new cancellations, the bulk of them at the Dutch port of Rotterdam.
This push and pull of physical copper through the LME warehouse system has generated a series of contradictory signals as to the market’s underlying dynamics.
The global exchange stocks picture, including inventory held in COMEX and Shanghai Futures Exchange (ShFE) warehouses, is less chaotic.
As of the end of last week global exchange stocks totaled 642,400 tonnes, up by 105,500 tonnes on the start of the year.
Volatility in the LME component has been inversely mirrored in the Shanghai component with the underlying up trend driven almost entirely by COMEX, where stocks have rebuilt to 13-year highs.
The London “Street” seemed to be amply forewarned about the latest stocks action.
On Wednesday morning, for example, Kingdom Futures’ daily report noted that “rumors are circulating that up to 70,000 tonnes more copper could arrive in an attempt to drive the price back down to help a significant short get out of a position”.
“If this is the case, it is unlikely that this material will stay there for very long,” it added.
Given the level of anticipation, it’s hard to believe rising LME stocks were a major factor in copper’s slide from those early-September highs to last week’s close at $6,507 per tonne.
Not only was the market looking seriously overbought, as just about every copper analyst agreed, but the price collapse started on Friday, June 8, before the first of those big stock inflows became public knowledge.
That said, it’s noticeable that copper volumes on the LME’s electronic system spiked higher in the half hour following the release of the stocks report at 0900 London time on Tuesday, Wednesday, Thursday and Friday.
This, of course, may be down to the fact that the sharp rises in LME copper stocks on those days provided extra ammunition for technical down moves that were already underway.
More worryingly, though, it may also be down to automated systems using the LME stocks reports as a trading signal.
This is certainly the view at Kingdom Futures. In its Thursday report it suggested that while “human traders were talking about (...) and indeed expecting” the latest 30,000-tonne jump in LME stocks, “algorithms and the like were just hit with the fact and triggered automated sell orders”.
This is not the first time the idea has been floated of robots reacting to LME stocks reports.
At a simple programing level, the daily reports represent a predictably-timed “hard” data point, which acquires extra weight if it reinforces an existing trading strategy.
It would be ironic if robots are indeed starting to “read” the LME stocks reports for trading signals even while human traders have learnt to treat them as infinitely “soft” and malleable.
While it’s difficult to separate out causation and correlation between LME stocks and outright price, the linkage looks harder when it comes to time-spreads.
But here again, there may be more happening than meets the eye.
LME spreads are arguably more sensitive to stock movements, particularly the live warrant component, than outright price.
So it was no huge surprise to see the nearby time-spreads flex wider in reaction to last week’s jump in on-warrant tonnage.
But the scale of the move is surprising.
As of Friday’s close the benchmark cash-to-three-months period was valued at a $46-per tonne contango, a level not seen since December 2009.
That suggests an extra element in the stocks-price relationship right now.
The most likely candidate is a sudden loss of appetite by banks to finance copper in South Korea due to the escalating tensions with its North Korean neighbor.
The LME’s three good delivery points in the country currently hold just under half the “live” tonnage in the LME system.
If banks are indeed pulling credit lines for that material, it would explain the severity of the move in the front-month contango structure.
All of which may have been good news for the bear.
But, judging by this morning’s stocks report, the bull has already reacted.
This battle looks set to run further.
(The opinions expressed here are those of the author, a columnist for Reuters.)
Editing by Edmund Blair