Having written on the copper market earlier this week, it was interesting to come across this well researched piece by Simon Hunt, respected analyst and founder of Brook Hunt in the 1970’s. Brook Hunt is a metals analysis consultancy based in the UK.
The point he makes is not subtle. According to Simon Hunt, the copper market has been rigged for much of the last three years. Production has been in excess of consumption since mid 2005 and because purchases are reported as consumption the market has been fooled into believing consumption has been growing at a faster rate than it really has. Hunt estimates consumption has grown by 1.5%. Consequently huge off warrant stocks have built up in China and elsewhere, probably in the region of 1.5 to 2.0 million metric tons. Hunt points to similar speculative buying that went on during the 1978-1980 bull market when 1 million tons of copper were hidden off market and became a decisive factor in the Sumitomo affair. In his words, bull markets in copper invariably are associated with manipulation. What is so different this time was the sheer scale of the operation.”
Needless to say such a massive stock position will take years to unwind, particularly in a recessionary environment. In the author’s estimation, the best case scenario is growth of 1.7% (as against a long term trend average of 2.7%) leading up to 2015 and the worst case could be 0.2% contraction. The effect on prices of the massive stock over hang, low growth and (so far) failure of mines and smelters to cut back could be prices behaving in a volatile fashion around a falling trend until 2018.
Hunts prediction? Post 2010 we will surely see prices below $2000/metric ton ($0.91/lb).