Unusual Copper Market Dynamics
Posted by Alana Wilson on 6/7/2013 10:04:18 AM
By John L. Dobra i
A recent Wall Street Journal article by Matt Day - Copper Delivery Rates Hit Highs - may signal some unusual goings on in metals markets. The article draws attention to the buildup in copper inventories in warehouses used by traders on the London Metals Exchange (LME) and has a somewhat misleading headline – it’s not that LME is delivering a lot of copper, it’s the opposite. Less copper is being delivered at record high delivery fees.
With copper prices falling for most of 2013 (the usual culprit blamed is slowing growth in Chinese demand), it seems that traders are using this as an opportunity to stockpile the metal. LME warehouse inventories, according to LME data, have increased by 92 percent this year to over 600,000 metric tonnes or almost 4 percent of annual mine production in 2011 . According to the WSJ article, “(t)wo trading companies, Glencore Xstrata PLC and Trafigura Beheer BV, have amassed most of that metal by outbidding other potential buyers in the spot market, according to traders in London, New York and Singapore who deal with the companies or their customers.”
These inventories have also been augmented by slower deliveries of the metal. It now takes spot market buyers, who are primarily manufacturers of wire, electronics and equipment, 23 weeks to take delivery of their purchases for “immediate delivery.” Fees for delivery, which includes renting space in the warehouse while the buyer is waiting for “immediate delivery”, are also rising (up 40 percent in the past two months) because of the longer delivery times.
Manipulating delivery times and stockpiling inventories is a fairly normal business practice and, according to a spokeswoman for LME, completely within the rules of the self-regulated exchange. It is also likely helping buoy copper prices and helping copper miners which, of course, Glencore Xstrata is. Also helping copper prices are temporary reductions in output from Rio Tinto’s Bingham Canyon Mine in Utah and Freeport-McMoran’s mine in Indonesia. According to sources cited in the WSJ article (Maquarie Group), this will reduce world annual supply by only about 1 percent. But, between reductions in mine output and delivery manipulations, world physical supply might be reduced by as much as 5 percent for part of the year. That marginal change might just be enough to sustain prices long enough for demand to increase and sustain miners’ profit margins. Or, maybe not. Mining and commodity trading are risky businesses.
Adding to the mix is the fact that copper futures are in contango – meaning futures prices are higher than spot prices for “immediate” delivery. Spot prices are currently $7,240 per tonne (US$3.28/lb.) and copper for delivery in December are around $7,500 (US$3.40/lb.). Combine that difference with the nearly $200 per tonne delivery fee and traders are making a 6 percent profit if they can hold copper for six months. You can’t make that holding Treasury bonds and there is less risk because you are slow-walking the copper through your own warehouse. I’d call that smart.
A copper consumer quoted in the WSJ article says "‘Gold and silver are investment metals—they're meant to be hoarded,’ … Now, ‘copper has changed from an industrial metal to an investment metal. That's the world we live in.’"
Well, maybe if you are invested in the copper wire business, you might consider investing in copper inventories – like Glencore Xstrata and other copper producers and traders. That’s how the market works. Quit whining and get your own copper warehouse. (And I’m guessing that is what they are doing. Or, they’re switching over to aluminum wiring and pvc pipe and give the copper miners and traders some of their own medicine.) That’s also how the market works – it’s a risky world out there.
The mining business involves more than knocking rocks and digging holes. Sometimes the most profitable “miners” wear tasseled loafers instead of mining boots.
iDirector, Natural Resouce Industry Institute and
Associate Professor of Economics
University of Nevada
Senior Fellow, Fraser Institute
Reno, NV 89557
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USGS, personal communication with Daniel Edelman, USGS Copper Specialist