Yesterday a colleague phoned me to say that he caught an interesting program on CNBC in which David Threlkeld a metals trader at Resolved Inc said, “We’re going to see a catastrophe in the market. The catastrophe he referred to is copper. Threlkeld argues that China has stockpiled copper to the tune of two million tons and that at some point, “China will release the stockpile onto the market. The CNBC articles goes on to say that another factor compounding the issue involves the fact that speculators have already bid up the price of copper having previously bet on a global recovery. The theory first started floating on the net about a week ago in this Business Week article. As observers of metals markets, we thought the article worthy of discussion. After all, few if any analysts have called for $1/lb copper for 2010. Here is the CNBC Fast Money clip:
But first, let’s review some of the other comments made by Threlkeld. According to the Business Week article, 90% of copper buying has come from speculators. Threlkeld explains as follows, “Whether they are exchange-traded fund speculators or China pig farmer speculators it doesn’t really matter, because that buying is going to come back to the market, Threlkeld also points to interest rates specifically that the $1/lb forecast “may be driven by higher interest rates in China or the US. Last, the $1/lb scenario Threlkeld looks at the inverse relationship between supply increasing and demand decreasing, “What we have now is we have a unique situation, whereby we have a surplus and production has gone up and consumption has gone down.
So let’s take a look at some of those comments. For sure, stocks have increased but we’d suggest that they have not reached historically high levels. China accounts for a large portion of overall copper demand (over 35% of global copper demand). We also think China stimulus programs around the power grid and rail projects will continue to support demand. True ETF and speculative activity could cause investors to dump shares/holdings if prices did collapse, perhaps further exacerbating a drop in copper prices. On the other hand, although China imports fell significantly in January from February (suggesting demand has fallen) they still haven’t hit anywhere near their 2008 lows. In addition, low scrap imports also suggest that China lacks direct-melt feed resulting in supply constraints that could increase demand for refined metal.
What can we conclude? It likely depends upon what theory you buy into and what road signs you watch to draw your conclusions.
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