LONDON (Reuters) - Copper has just burst into life after a year of choppy sideways trading.
On the London Metal Exchange (LME) benchmark three-month copper has exploded to the upside, hitting a 15-month high of $5,443 per tonne on Wednesday.
As is the way with markets, the move is feeding on itself as shorts buy back positions and momentum-chasing funds join the action.
Money managers were already lifting their exposure to copper even before this week. Funds were net long of the LME copper contract to the tune of 54,098 lots as of last Friday. It’s the largest collective bull position since the LME first started publishing its commitment of traders report in 2014. The long position has almost certainly grown further over the last couple of days.
It’s tempting to dismiss this move as another tremor from the Trump election earthquake with a falling dollar the transmission mechanism. But copper began breaking upwards several days ago when markets were still pricing in a Hillary Clinton victory.
So what’s going on? And what happened to that big supply surplus which has kept copper boxed in below $5,000 since the start of 2016?
What trades on the LME and other exchanges such as CME and the Shanghai Futures Exchange (ShFE) is refined copper.
And the refined metal part of the copper supply chain is in essence balanced between supply and demand.
That, at any rate, is the view of both the International Copper Study Group (ICSG) and the International Wrought Copper Council (IWCC).
The ICSG assessment is that the global market will record an 8,000-tonne supply-demand shortfall this year before moving to a 163,000-tonne surplus next year.
The IWCC is forecasting a cumulative 180,000-tonne surplus over the same two-year period.
In the context of a 23 million-tonne global market, the difference between the two is no more than a rounding error.
The ICSG has tweaked its numbers since its last forecast in March. It has lifted its estimate of 2016 refined production growth from 0.5 percent to 2.2 percent, slightly higher than the IWCC’s 2.0 percent assessment.
But, critically, the ICSG has also raised its usage forecast for this year from 0.5 percent to 1.5 percent, largely reflecting the pace of “apparent” usage growth in China.
“Apparent” usage is a statistical hall of mirrors, based as it is on what can be counted and not necessarily on what really counts in the world’s largest user of the metal.
The Group concedes that “real” demand growth in China may be closer to 4.0 percent this year, chiming with the IWCC’s forecast of 4.1 percent growth.
The higher figure also tallies with the broad consensus among analysts, who have collectively upgraded their own Chinese demand expectations after the early-year government stimulus, channeled as ever through construction and infrastructure spend.
Graphic on LME and ShFE copper stocks:
The “apparent” usage methodology is founded on “hard” figures such as China’s imports and exports.
And these have fluctuated wildly over the last year.
Imports boomed over the November 2015-April 2016 period. The cumulative tally was 2.23 million tonnes.
To put that into perspective, they were running at an annualized pace of almost 4.5 million tonnes, which would have far exceeded even last calendar year’s record 3.7 million tonnes.
Then exports surged over the May-August period. At a cumulative 260,000 tonnes they were running at an annualized pace of 780,000 tonnes. The previous high for any calendar year was 293,000 tonnes in 2013.
Stocks of copper registered with the LME and the ShFE have reflected this ebb and flow.
LME stocks fell to an 18-month low of 141,075 tonnes at the beginning of April. ShFE stocks, by contrast, soared to an all-time high of 394,777 tonnes in March.
As the import-export pendulum turned, LME stocks rebounded to 379,165 tonnes in late September. ShFE stocks have slumped to just 97,839 tonnes.
The pendulum appears to be swinging again with LME cancellations and outflows running at accelerated levels.
But it’s increasingly clear that these apparently contradictory signals have reflected no more than a convoluted roundabout with physical traders arbitraging the two markets, playing with a mix of futures spreads, physical premiums and warehouse incentives.
Stock movements, so closely watched by the market for clues as to supply-demand balance, have generated only noise this year.
As of the end of October the net year-to-date movement in all global exchange copper stocks, LME, ShFE and the CME warehouse system, has been a rise of just 22,500 tonnes.
Which would seem to be another indication that this market has been and still is “broadly balanced”, to quote the IWCC.
Which doesn’t mean there hasn’t been a shift to surplus dynamics in the copper market.
It’s just that it’s taken place in a different part of the supply chain.
Mine supply of copper concentrates, excluding straight-to-metal operations using leach technology, is on course to grow by around 6 percent this year, according to the ICSG.
And that calculation includes an allowance for unexpected disruptions, which until the last month or so were running at an unexpectedly slow pace.
It’s no secret where all that extra supply has been going.
China’s imports of copper concentrates surged by 31 percent to 12.2 million tonnes (bulk weight) in the first nine months of this year. And the year-ago period itself represented a record pace of import.
The country is now the world’s largest refined copper producer as well as its largest user and its smelters have been soaking up raw materials surplus.
Chinese refined production rose by 8.4 percent in the first nine months of the year, according to the National Bureau of Statistics.
The problem is no-one fully trusts these figures. Moreover, given the rate of increase in imports, the headline increase looks on the low side.
Have China’s smelters been refilling stocks depleted by years of mine shortfall? Will they convert inventory into refined production next year?
Difficult questions to answer. Even by the shadowy standards of copper market statistics, what’s going on at the concentrate stocks part of the supply chain is a very dark place indeed.
What is clear right now is that the market, or at least the fund part of it, has shifted its collective view about the size and impact of the much discussed wall of copper supply.
Because beyond the shadowy statistics and the misleading stock movements, the truest signal is the price.
(The opinions expressed here are those of the author, a columnist for Reuters)
Editing by David Evans
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