LONDON (Reuters) - The amount of available copper stored in the London Metal Exchange’s (LME) warehouse system fell to 21,600 tonnes last week, the lowest level since 2005.
The year 2005 marked the start of an extraordinary six-year rally that was only briefly interrupted by the Global Financial Crisis. The copper price more than tripled over the period, topping out early 2011 at $10,190 per tonne.
With hindsight, desperately low exchange inventory was a signal that copper supply was being overwhelmed by the demand surge caused by China’s industrialisation program. LME stocks didn’t start rebuilding in any meaningful way until 2009.
What are super-low LME stocks telling us this time around? Is the world really running short of copper to the point there are just over 20,000 tonnes left in LME warehouses?
The answer is clearly no. There is plenty of copper in China and some of it may shortly be heading for the nearest LME warehouses.
The squeeze on the LME copper contract probably has only a limited shelf life.
But that’s not to say that low LME stocks aren’t telling us something, even if the message is being drowned out by the noise of battle across the LME timespreads.
LME headline stocks of 123,425 tonnes are historically meagre but slightly off the decade low of 119,900 tonnes seen in December.
However, it’s the amount of what the LME terms “open” stocks that counts when it comes to reconciling trading positions. These fell to 22,600 tonnes at one stage last week with a slight rebuild to 26,825 tonnes in this morning’s report.
That still leaves 78 percent of all LME inventory in the “cancelled warrant” category, theoretically awaiting physical load-out.
Unsurprisingly, such a low stocks base has translated into timespread turbulence with a running squeeze on cash LME copper.
The cost of borrowing copper overnight, the “tom-next” spread [CMCUT-0), shot out to $20 per tonne at one stage last month and was still a hefty $5 this morning.
If you’re wondering who’s been putting on the squeeze, you have no shortage of suspects. The LME’s market positioning report for Friday showed nine “dominant” long positions, possibly a record for any LME-traded contract.
Now, given these positions are measured against the depleted LME “open” tonnage, most of them are not necessarily that dominant.
But the congested landscape is a sign of how many traders have gone long the copper spreads in the belief that the market would tighten.
Which it has, largely thanks to the rapid slide in LME warehouse stocks.
Whether someone has accelerated the process by cancelling large tonnages of LME stocks is a moot point. If so, there is evidently no shortage of suspects.
The metals trading landscape has changed much between 2005 and the present day and the LME is no longer the centre of the metallic universe.
Now it is one link in a fluid arbitrage chain between a resurgent CME in the United States and the increasing powerhouse that is the Shanghai Futures Exchange (ShFE) in China.
And while LME and CME copper stocks have been shrinking, those in Shanghai have jumped by 108,363 tonnes to 227,049 tonnes since the start of January.
This is normal for this time of the year, reflecting the downturn in manufacturing over the Chinese winter and the Lunar New Year holidays.
But it also results from a strong pace of imports that appears to have left the Chinese market saturated. China soaked up a record 3.75 million tonnes of refined copper last year and January’s tally of 336,680 tonnes was up 7 percent year-on-year.
In Shanghai what you see on the exchange is more than matched by what’s sitting in the port’s bonded warehouse.
With local physical premiums bombed out at two-year lows around the $50-per tonne level, there is every incentive for copper to reverse-flow out of China in the direction of LME warehouses in South Korea.
The concentration of LME tightness on the very front part of the forward curve suggests the market is expecting arbitrage flows with China to replenish LME warehouses and alleviate the cash-date tensions.
The LME spread squeeze has distorted the stocks picture but that’s not to say that there isn’t a fundamental signal being transmitted.
Global visible inventory in the form of combined stocks held by all three exchanges was 405,430 tonnes at the end of February, down 46 percent from last year.
Moreover, the distribution of that inventory has changed dramatically over the last couple of months. As CME and LME stocks have drained away, what’s registered with the ShFE now accounts for 56 percent of the total.
Feast in China, but apparently famine everywhere else.
This may be down to an unusually high number of smelter outages outside of China.
Starting with the longest-running, India’s Vedanta is still navigating the legal process of getting permission to restart the Tuticorin plant in the state of Tamil Nadu. The 400,000-tonne-per-year smelter has been closed since May last year.
In Zambia one smelter, Chambishi, has closed and one, Vedanta’s Nchanga, has cut production in response to a new tax on copper concentrate coming over the border from the Democratic Republic of Congo.
Chile’s Codelco, meanwhile has two of its four smelters off-line for refits to comply with new emissions regulations. The work on the Chuquicamata and Potrerillos plants commenced on Dec. 13 and should reportedly take 75 and 45 days, respectively.
Codelco has scheduled maintenance at a third smelter in October and others taking downtime this year include Aurubis, Pan Pacific Copper, Mitsubishi Materials and Sumitomo Metal Mining.
“We could be heading for a second year when smelter outages are higher than mine outages which is unusual in copper,” according to BMO Capital Markets commodities analyst Colin Hamilton
In theory all the surplus concentrates will just go somewhere else to be processed into refined metal. This really means China and it’s worth noting that the country’s imports of concentrates are also running at record levels.
But the metal will then be in China, much of it trapped behind the country’s tax wall and not available for delivery to the LME unless there is a premium to do so.
The current squeeze on LME stocks may play itself out shortly. But as long as refined metal flows continue to be disrupted by smelter outages, it may not be the last squeeze this year.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Louise Heavens