Do you struggle to understand the copper market? Well, if it’s any consolation, you are not alone.
While on the one hand we have had months of predictions that the market is going to be buried under a wave of new mine supply, on the other hand, we have seen dwindling LME inventory and an LME exchange front-month tightness since December.
Currently the cash-to-three-month period is in a $40-per-ton backwardation, meaning that cash is trading at a premium to the three-month price. As an illuminating article by Reuters points out, though, the market has been struggling for the last few years with (at best) a partial view of what is really happening to supply, demand and inventory.
Inventory has been trending lower for months, as this graphic from Reuters shows, suggesting consumption continues to run ahead of supply:
Even as stocks have dwindled, those that have remained have been earmarked for load-out yet remained trapped behind warehouse queues. Open tonnage, the only material actually available for trade, is hovering just above multi-year lows at a current 128,400 tons.
So what has happened to the surplus we were promised?
According to Andy Home at Reuters, the root cause of the confusion has been the missing component in the calculation used to determine market balance.
The International Copper Study Group (ICSG) and others have been comparing global production with global usage and making an allowance for inventory based on the amount of metal sitting in the warehouses of the three major exchanges – the London Metal Exchange, COMEX and the Shanghai Futures Exchange. But in recent years, all three have been eclipsed by a fourth stockpile, the metal sitting in Shanghai’s bonded warehouse zone.
Coming Up: What this all means for metal buyers.