Column: Low global copper stocks collide with bearish market mood

LME inventory remains very low by any historical criteria, representing just two days of global usage.

But this is not just an LME phenomenon. The inventory listed on both the CME and the Shanghai Futures Exchange (ShFE) is also very low, with the three exchanges holding only 200,000 tonnes of metal between them.

The bullish view of stocks does not mesh well with the bearish mood of the market. Currently trading around $7,715 per tonne, three-month LME copper fell 21% in early 2022 as the market worries about slow economic growth in China and a possible lack of growth in Europe.

The disconnect between visible inventory and price is leading to time constraints on all three bourses and renewed interest from analysts in trying to estimate hidden copper stocks.

Copper shares listed on LME, CME and ShFE
Copper shares listed on LME, CME and ShFE

All you can see…

Registered tonnage with the three big copper exchanges totaled 195,560 tonnes at the end of August, a marginal increase from 5,450 tonnes in early January, but a decrease of 185,650 tonnes in August last year.

There has been little change so far this month, the slight increase in LME inventory offset by continued draws from US CME warehouses.

A broader picture of copper stocks can be created by including two relatively new data series.

In February 2020, the LME submitted a monthly report on “shadow stocks”, denoting metal stored off-market but with an explicit contractual reference to the LME’s delivery option.

There were significant amounts of this type of unsecured copper in 2020 and early 2021. At their peak of 175,000 tonnes in February last year, they dwarfed the LME-recorded copper inventory of 74,000 tonnes. However, they have since been reduced to just 17,000 tonnes at the end of July.

The Shanghai International Energy Exchange (INE) launched its international copper contract in early 2021 and has since published weekly figures for stocks in bonded warehouses held against the contract.

They currently stand at a substantial 89,000 tonnes and have grown by 23,500 tonnes since the beginning of January.

Registered exchange stocks combined with LME shadow and INE bond stocks represent the full picture of statistically verifiable copper inventory.

Combined holdings were just under 330,000 tonnes at the end of July, an accumulation of 61,000 tonnes over the first seven months of the year, but 159,000 tonnes below what they were in July 2021, and still only equivalent to five days of global use.

Global copper stocks including LME Shadow and INE bonded
Global copper stocks including LME Shadow and INE bonded

…What you cannot see

Obviously, there is more copper “out there” in the statistical darkness.

Half a million tons, according to Citi analysts, who “believe that market-implied convenience yields can show us what we can’t see.” Futures curves trade around 500,000 tonnes of invisible stock outside of China, the bank estimates. (“Metals Weekly,” Sept. 16, 2022).

Citi, which expects the price of copper to fall to $6,600 in the first quarter of next year, argues that there is “adequate inventory buffer to bridge the gap between now and a more pronounced slowdown in demand as a possible recession in Europe during the winter”. months”.

However, there are important caveats to this type of calculation, as Citi itself acknowledges. The LME futures curve may be pricing in all kinds of hedging flows, including temporary builds in Chilean port stocks, swings in Chinese bond stocks and metals transportation delays.

The problem is knowing how much of the implied stock is accessible rather than going directly to a manufacturer.

There are two more complications in the current combination.

Russian copper is not officially sanctioned, but the self-sanction may already be disrupting the normal channels for the flow of physical metal to the European market.

Meanwhile, Chinese trader Maike Group is now in talks with state-owned companies after running into financial difficulties.

Maike is one of China’s top copper traders, importing about a million tonnes a year, and the financial boost exercise may make waves in the physical market.

Russian and Chinese metals events are also likely to play out on the LME timeframes, which in turn will affect the desirability curve calculation.

spread the tension

Time spreads can also be an extremely volatile barometer, particularly when few stocks are covered in physically deliverable contracts.

The LME premium for spot deliveries over three months soared to $150 a tonne last week and is still trading around $55 despite strong deliveries of collateralized copper on Tuesday.

The CME curve is also being rocked by a mini-squeeze, the September-December spread spiked to over 5.4 cents a pound last week and last time traded at 4.4 cents, equivalent to $97 a pound. ton.

CME’s inventory, concentrated in Salt Lake City, Tucson and New Orleans, has been falling steadily since June and is now down 31% at the start of the year to 41,471 tonnes.

ShFE-registered stocks are even lower at 35,865 tonnes, which has led to a sharp pullback in the Shanghai curve until the April 2023 contract.

Current bearish thinking is that there will be plenty of metal as Europe slips into recession and China struggles to escape the shackles of ongoing lockdowns and sinking real estate.

However, until then, super low stocks on all three exchanges will continue to create volatility in spreads until such time as what is “out there”, however much it may be, moves somewhere where it can be counted.

(The views expressed here are those of the author, Andy Home, a Reuters columnist.)

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