(Andy Home is a Reuters columnist. The opinions expressed are his own)
By Andy Home
LONDON, Feb 6 (Reuters) - There suddenly seems to be a whole lot of copper around.
On Thursday the London Metal Exchange (LME) reported a 32,500-tonne rise in inventories, reflecting the warranting of 32,750 tonnes of copper.
Aluminium traders will probably shrug their shoulders. That market has long got used to massive tonnages hitting the LME system.
But in copper a single-day increase of this scale is almost unheard of. Indeed, you’d have to go all the way back to July 2001 to find a bigger one-day surge, as shown in the first of the charts below.
And it merely marks an acceleration of a trend that has been running since the start of the year. LME stocks have risen by 107,425 tonnes, or 61 percent, since the beginning of January.
The cumulative increase over the last five months of 2014 was just 30,825 tonnes.
The world, it seems, is positively awash with the stuff, a perception that of course fits nicely with the January implosion in the copper price.
The current bear consensus is predicated on a view of oversupply in the copper market, a function both of rising production and slowing demand growth, particularly in China.
Yet the market can’t have miraculously switched from deficit to surplus between the last day of 2014 and the first day of 2015, can it?
So where is all the metal coming from? And why now?
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on LME copper "arrivals" since 1998: link.reuters.com/fan93w Graphic on 2014 LME inflows by location: link.reuters.com/xym93w Graphic on LME stocks and LME spreads: link.reuters.com/vym93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The single largest component of Thursday’s bumper crop of “arrivals”, 20,675 tonnes, took place at Antwerp.
Indeed, as shown in the second graphic, the Belgian port has received more metal than any other LME good-delivery location since the start of the year.
And it’s worth drawing a lesson from the aluminium market that when thousands of tonnes of metal hit the LME system, it doesn’t mean warehousemen working overtime to load newly-arrived metal into LME registered sheds.
Rather, its appearance in the LME system simply means someone has warranted metal already in those sheds, which in this day and age can be effected with the stroke of a keyboard.
The most obvious reason is usually to make a physical delivery against a short position on the LME.
Remember that the front part of the LME copper curve CMCU0-3 has been consistently in backwardation since July of last year. It is still in backwardation.
Shorts closing their positions by physical delivery rather than by paying the backwardation to roll that position forward is how the market rebalances.
Indeed, more interesting a question than why is why now?
The LME copper market has been starved of fresh inflow for many months despite that backwardation, a structural tension that was growing ever more anomalous.
So why now?
Well, actually, it’s by no means unusual for LME stocks to increase over the northern hemisphere winter months.
In the 2003-2014 period the only months of average LME inventory increases have been August, November, December and January.
That captures the seasonal nature of fabricator activity, specifically the summer and winter holiday periods. As activity dips, so do physical premiums. This amplifies any incentive to deliver metal into the LME system deriving from a backwardation structure.
The global pattern can be accentuated by the national pattern in China, where manufacturing winds down leading into the Lunar New Year holidays, which start on Feb. 18 this year.
China’s spot copper market action also slows, particularly if fabricators are unsure of their post-holiday order-book outlook and particularly if the local market is still digesting heavy year-end imports. Both of which conditions apply right now.
It’s therefore not entirely surprising that another major stream of inflow in the LME system has hit Asian locations, with seasonal weakness intertwined with the magnetic pull of the current backwardation.
And maybe another sort of magnetic pull as well.
LME warehousers offering incentives to attract metal into their sheds is all part of the metals business, albeit one which the LME itself wants to have a closer look at.
(One of the more contentious elements of the exchange’s proposed overhaul of its warehousing system is the requirement for operators to supply details of their incentives on a quarterly basis.)
Since such deals are, for pretty obvious reasons, highly confidential, it’s a bit tricky to factor them into LME stock movements with any degree of certainty.
But a tell-tale sign is often the resulting concentration of stocks in one location, such as New Orleans in the case of copper. The U.S. port currently holds 106,450 tonnes, representing 37 percent of total LME tonnage.
It has also accounted for 9,550 tonnes of warrantings so far this year, making it the fourth largest “arrivals” location.
The continued flow of copper into LME sheds in New Orleans, however, is in stark contrast to the steady depletion of copper inventory elsewhere the United States.
COMEX stocks have been steadily falling since the start of the year and, at 20,189 short tons, they are back at levels last seen in July 2014.
That’s a clue that the entire copper world hasn’t tipped from chronic deficit to glut in the space of a couple of weeks.
Rather, it’s a clue that the current surge in LME warehouses is in large part about the LME market itself, where incentives, both warehouse and market, are stimulating an influx of metal, some of which may well have been “there” all along.
This is, after all, what a backwardation is supposed to “do”, even if it’s a case of better late than never for the London market.
Throw China’s own seasonal buying patterns into the mix and you start to get an idea of why the expected copper surplus appears to have arrived with such an unlikely bang. (Editing by David Evans)