Is copper really in surplus?
Comment of the Day

October 22 2013

Commentary by Eoin Treacy

Is copper really in surplus?

This article by Geoff Candy for Mineweb may be of interest to subscribers. Here is a section
The problem that faces Natixis, however, is trying to figure out how much of these withdrawn stocks have actually been consumed.

The group then posits 3 different models in a bid to solve that question.

The first supposes that Chinese imports of refined copper have averaged roughly the same as in 2012 - "somewhere around 280,000 tonnes per month".

Such an assumption, taking the data from the first five months of the year, would imply, "Chinese destocking of a little over 300,000 tonnes of copper, followed by a neutral effect between June and August".

The second model, examines the data under the assumption that Chinese end-user demand for copper grows in line with GDP.

"Under this model," Natixis writes, "measuring estimated demand versus apparent demand (production + net imports -stock changes in reported inventories) would give us destocking from unreported inventories of almost 300,000 tonnes over the first four months of the year, followed by restocking of around 165,000 tonnes in the months since then.

The group says it is more inclined to believe the above two models than the third one which is based on copper semis fabrication.

While it says, that this last model provides "a number most closely in line with the anecdotal fall in stocks at bonded warehouses, we suspect that this overstates the true situation substantially, since many of these bonded copper stockpiles were reportedly diverted to other warehouses in the Far East"

Eoin Treacy's view As a vital commodity for international trade and infrastructure development the price of copper exerts a considerable influence on investor sentiment. Over the last decade China has become the world's largest consumer. This prompted a great deal of investment in new supply which is now coming online. Ascertaining whether the market is in surplus or deficit is a therefore a difficult proposition. The price offers some clues.

Copper and tin have been comparatively firm when compared to the other industrial metals, having held the majority of their earlier advances. As a result we can conclude that the marginal cost of production may have risen more for these metals and/or that supply has increased less than for nickel, zinc, lead and aluminium. For example, as both David and I have mentioned previously, Indonesia has been reducing tin exports which has helped support prices.

LME traded copper hit a medium-term peak near the psychological $10,000 level in early 2011. The ramping up of Mongolia's Oyu Tolgoi mine to full capacity represents a major source of additional supply which has contributed to copper returning to test the lower side of its 2-year range near $7000. It is currently testing the region of the 200-day MA but a sustained move above $7500 will be required to confirm a return to demand dominance beyond the short term.

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