(This is Part Two of a two-part series. Read Part One here.)
METALMINER: Simon Hunt recently said in an interview that most of the copper consumption in recent years has been due to financial investment rather than industrial purposes; do you agree with that sentiment?
JOHN GROSS: I would. You can take it from two different points of view: the heightened level of speculation in the market, which directly contributes to volatility, and the advent of ETFs in the metal market. Although [ETFs] have been on “Page 1 as early as a few months ago, they’ve fallen to say page 2 or 3 recently. But the assumption there, the logical progression, is that if the [physically backed] ETFs are requiring physical metal to support them, they will take metal away from the industry.
MM: What about reports of the discrepancy between “actual consumption and “apparent consumption in China, which could indicate oversupply rather than shortage?
JG: The difficulty of oversupply is you can’t quantify it. You are guessing what it may or may not be, and there is little to be gained from that.
MM: What are a few important points that a company should know about hedging their copper buys?
JG: Each sector of the industry has its own traditional approaches to pricing of metal. The key issue is, if a manufacturer is selling metal over a certain time period, it is incumbent upon them to hedge their price riskÂ¦In terms of hedging copper buys, the question should be turned around. That is to say, how a company sells copper contained in product should dictate how they buy.
For example, assume a wire & cable manufacturing company sells copper in cable with the ‘copper price in effectÃ‚Â on date of shipment’ and they ship consistently throughout the month. The company is generally receiving the average price over the course of the month and therefore should be buying copper at the average price in that month. Thus, they are inherently hedging their risk.
On the other hand, if a company today is making a sale for delivery in, say, September at a firm price, they should lock in a purchase price with their supplier, or alternatively buy a September futures contract as an offset to the sale.
MM: Are futures the best/preferred way to go? Or are there other forms of effective hedging?
JG: The futures market is the most logical approach. Options can be viewed as an alternative, but typically they become more expensive, which reduces their viability for many companies.
MM: Are you in the camp of the bulls in terms of continually rising copper prices throughout 2011 and beyond? What’s your forecast?
JG: I cannot say I am in the camp of those who expect the price to rise continuously. Instead, I watch the market day to day. In my mind, there are too many risks that may prevent the market from achieving the record high prices that many anticipate. Although if, as expected, the marketÃ‚Â will be in deficit this year, we have seen inventories on COMEX, LME and Shanghai rising — with the total up almost 112,000 metric tons since year-end. Also, the forward price curve has changed dramatically over the past few months. May 11 an 12, for example, was in a 16Ã‚Â¢ backwardation in mid-December, but is now trading at a 4Ã‚Â¢ contangoÂ¦I don’t discount the possibility of higher prices, but I would have to see inventories decline, the backwardation return, and evidence that demand from China will not be negatively impacted by a slower economy.
MM: I know you’re a copper expert, but any specific thoughts on other base metal activity that buyers should keep an eye on?
JG: The one thing I’m concerned about and this applies to all base metals is that we have a very significant bubble developing in metal markets and commodities overall. At some point it will correct; I don’t know when, and I don’t know what will cause it, but it will correct at some point. Certainly copper, lead and zinc are the big [ones to follow]. With aluminum, there’s an excess of 4 million tons in inventories. Arguments exist that metal is tied up in financing, but that doesn’t mean the metal itself does not exist!