Copper: Not Looking Quite So Strong

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The International Copper Study Group (ICSG) still expects a 237,000-ton deficit of refined copper in the world this year, while the World Bureau of Metal Statistics reports the market was in deficit of 125,000 tons in January to October this year.

LME stocks are down 42 percent from a year ago, according to the WSJ, yet Reuters is reporting that banks are withdrawing Letter of Credit facilities for Chinese imports of copper, worried that the market is looking risky.

So what’s going on?

Chinese imports of copper have been strong this year in spite of rising stocks in China and slowing demand.

Although China’s real annual consumption of refined copper may rise 4.8 percent to 7.68 million metric tons this year, that is weaker than growth of 7.8 percent in 2011, 11.5 percent in 2010, 19.6 percent in 2009 and 11.8 percent in 2008, Reuters reports state-backed research firm Antaike as saying.

Those imports are mostly sitting as bonded warehouse stocks, estimated to be some 900,000 metric tons now, having risen steadily all year. Yet copper stocks traditionally fall over the summer months due to demand from air-conditioning and power grid projects.

Banks are apparently getting sensitive to the financial trade importing copper and using it as collateral for further trading. Having lost money on loans to the steel industry this year, banks are reported to be more wary of lending to a market they fear could be headed for a bubble.

Indeed the nature of the risk is called out by none other than copper veteran Simon Hunt in an FT article, in which he says copper has become an intrinsic part of the money game — just another unit to securitize regardless of the impact on industry.

Warning that the metal has lost at least 3 million tons to substitution in all its forms over the last seven years, Hunt adds, that figure risks getting even larger over the next seven years, not just due to traditional substitution but to the introduction of new technology.

Calling out the financial community’s involvement in copper as a risk, he says another financial bubble is being built around copper, with perhaps some 5 million tons being held outside the reporting system. Concluding that this bubble, like all others, will burst one day.

Whether he is right remains to be seen. The price has been held up by the supply market slipping into and out of deficit, unlike other industrial metals which are firmly in surplus.

But apparent demand and real demand are two different things and if off-market stocks really are 5 million tons as he suggests, the market has, in reality, been in surplus for some time.

The supply market is looking better now than for some years, so the true nature of demand in China, the world’s largest consumer by far, is that much more critical to the future direction of prices.

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