By Andy Home

“Who’s got all the copper?” was the headline question in my last column on the copper market. The answer, according to the Wall Street Journal, is Red Kite, the specialist metals hedge fund set up by Michael Farmer, a man who was trading the copper market before many younger readers were born.

Well...maybe. But...maybe not. It’s always a bit tricky to say in the hall-of-mirrors that is the London Metal Exchange (LME). What is not in doubt is that someone has been exerting a vice-like grip on LME copper stocks for many, many weeks. The LME dominant positions report shows one entity owning 80 to 90% of “live” copper tonnage in the LME warehouse system. Since this is the LME, where nothing is quite as simple as it appears, the report actually describes the state of play at the close of business on Tuesday.

Not entirely surprisingly, given such positioning, the nearby spreads on the LME copper contract are tight. The benchmark cash-to-three-months period was valued at $75.50 per tonne backwardation at Wednesday’s close. But they have been tight throughout this year, with the front part of the forward curve in almost continuous backwardation. That’s because LME stocks have been low throughout the year and they still are. The tally of 162,625 tonnes is less than half that at the start of January. Strip out the metal awaiting physical load-out and the total diminishes to just 126,200 tonnes. More interesting a question than who owns all the stocks, is how come stocks are so low in a year that was supposed to be one of surplus?

Emphasis on the words “supposed to be” in that last sentence. Because, it turns out, this isn’t going to be a year of copper supply surplus at all. Twice a year the International Copper Study Group (ICSG) meets in Lisbon to assess the statistical state of the global copper market. Twice a year it publishes its resulting forecasts.

The latest came out on October 14, 2014 and it amounted to a spectacular statistical U-turn on the April forecast. Back then the ICSG was expecting a 405,000-tonne supply-usage surplus in the global refined copper market this year. That’s just been changed to an anticipated 307,000-tonne deficit. The forecast surplus for 2015 still stands but it has been cut to 393,000 tonnes from April’s 595,000 tonnes.

Now, taking a statistical snapshot of something as complex and dynamic as a global industrial metals market is always going to be a massively difficult task. Production may be relatively easy to count, but scrap is a perennial headache, not least because it impacts on both sides of the supply-usage equation. It is used both as a raw material input to produce refined copper and as an input into first-stage copper usage in parts of the fabrication chain. Then, there is the even bigger headache of accounting for changes in off-market inventory, particularly copper sitting in bonded warehouse in China.

Over the past couple of years such bonded stocks have dwarfed exchange inventory everywhere else, which is highly problematic since there is no equivalent of the daily stock reports published by exchanges such as the LME. The ICSG has been using its own consultants to track changes in these bonded stocks and now issues two sets of market balance figures, which can vary markedly depending on whether such changes are included in the count or not.

Last year’s estimated deficit of 272,000 tonnes, for example, mushrooms to a deficit of 519,000 tonnes once changes in Chinese bonded inventory are factored into the equation. The key point here is there is no statistical “truth” when it comes to a market such as copper. Forecasts will invariably vary, because there are so many variables, and outcomes will shift depending on methodology.

That said, though, the ICSG hasn’t changed its methodology in the six months between its April and October projections.

The consensus narrative in the copper market has been a shift from famine to feast as miners finally reverse years of under-investment through a combination of new mines and expansions of existing operations. That corner appeared to have been turned last year, when mine production growth surged by 8%. However, last year proved to be something of an outlier, partly because, extraordinarily for the copper market, hardly anything went wrong with mine supply. This year has been very different. As the ICSG notes in its October forecast, “operational failures combined with delays in ramp-up production and start-up of new mines are leading to lower than anticipated growth.”

Think, for example, of the totally unexpected closure of the two big copper mines in Indonesia, Grasberg and Batu Hijau, after the government decided to change its export tax rules at the start of the year. Or, more topically, consider the re-emergence of industrial unrest with strike threats at Grasberg and the Antamina mine in Peru.

Moreover, while last year’s surge was driven by expansions of existing mines, this year’s increase is largely coming from new operations, which inevitably come with the normal operational teething problems. The other stand-out is the ICSG’s upwards revision to apparent usage this year since its April meeting. And do take note of the word “apparent”, a way of calculating usage that doesn’t factor in changes in those bonded stocks in China, where apparent usage is expected to grow by 7%.

 

Andy Home is a columnist for Reuters. The views expressed are his own.

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