Something strange has been going on with forward dated copper, both the 3 month LME and the Shanghai Futures price for February (and to an extent March) have been rising relative to spot. Open interest contracts have increased markedly last week. At first sight there doesn’t seem any obvious reason why until one reviews the recent news, reported on MetalMiner too, or comments made by China’s central bank regarding the appreciation of the Renminbi and an adjustment if not outright severing of the Renminbi-US Dollar peg. It is probable that Chinese investors are hedging against a possible adjustment in the rate prior to the early spring of next year underlining the significance copper has in the mindset of Chinese market players. And why not when you look at the rise in copper this year, some 116% according to the Financial Times. Copper has rewarded those that have bought early and held the metal. Much of the rise was attributed in the first half of 2009 to the State Reserves Bureau but in reality they acted as no more than a catalyst. Of the 2.6m tons imported so far this year into China, the SRB made up just 235,000 tons. They would have bought more but the price rose too far, too fast and they stopped buying when it got to around $5000 per ton. Interestingly the article quotes Antaike, a state-owned Chinese commodities data provider, as publicly estimating that end users are only buying 10% more metal in 2009 so there is around a million metric tons of excess stocks accumulated in China this year, or about two and a half months of real end demand. Much of this is supported by state bank loans made to companies for legitimate business investment but in the absence of viable capital investment opportunities companies have used it to speculate on rising metal prices.
In itself this isn’t a significant risk unless for some reason the dollar rallies and the copper price falls, in which case the banks making the loans covering these stockpiles could make margin calls. If that happens positions could be liquidated and a quick fire would have the effect of pushing the price down further. As the price dropped more positions would experience margin calls and so on. There is no way of knowing what the average price of these positions is sitting at but judging by how far the price has risen, the chances are its around $5000/ton+ so not at any imminent risk of being subject to distress liquidation. If demand remains strong, these positions will probably be absorbed into ongoing consumption as 2010 unfolds. For now imports have slowed yet the price has remained firm. Steady as she sails captain let’s hope there are no rocks below the surface.
–Stuart Burns
