Supply Crunch At Hand For Copper?

By Jonathan Barratt

Copper has managed a bounce from what many thought would have seen the commencement of another major leg lower. The metal broke through support and an important low created Oct 2011, it looked to the downside to trade, then reversed. Given the economic conditions prevailing at the time of the break we would have though that the sell off would have continued. However this was not to be with the metal making a solid comeback. In our reports, we have always talked about US300 [/lb] or US6700 [/t] as being important levels the market needs to hold onto in order to retain a confident composure for the metal.  It has been interesting standing on the sideline watching the price action, or rather the lack thereof, as it has essentially been range-bound for many months. However, with the recent positive price action whilst economic news particularly in China is mixed something else may be brewing which has invigorated our bullish sentiment towards the metal. This bullish factor we feel has to do with inventories.

Copper inventories for the better part of the year had been rising; in fact on the 25^th June this year we reached historic amounts of the metal held in LME warehouses. However since then inventories not only at the LME but also in Shanghai have been coming off at a clipping pace. The premium paid for copper traded for immediate delivery moved out to US18 indicating an immediate shortage of the metal to meet industry demands. It is interesting to see that we still have considerable demand for the metal to command a premium even though economies perhaps just do not justify the demand. Why would this affect the spot prices when we have such high inventories? This is where it becomes interesting, as looming just below the inventory level is an amount of metal that is wrapped up in loans and finance deals that is simply not available to the market. As such the inventory levels are perhaps not a true reflection on where readily available inventories are. As a result there is supply tightness in the metal for immediate delivery. We feel that supply is really not there to meet demand hence the recent price rise.  This provides solid evidence to suggest two important ideas. Firstly that the reason the price has not declined whilst inventories have risen, which is what would be expected, is because the inventories going into warehouses are as a result of loan deals etc and not available for consumption. And secondly, that when demand as a result of economic stimulus finally picks up we cannot rely on supply from LME warehouses to meet or ease the encroaching demand should economic activity intensify. In summary a supply crunch is on the cards.

So as a result of economic activity,  slightly picking up and lack of supply,  a bull market for the metal is just around the corner.  We continue to like the metal at these levels and feel it is worthwhile getting a little exposure . Stops US295.

Chart Point

As we pointed out at the beginning of this piece the fact that we broke through major support and then bounced back suggest a low of some importance is in play. Although the price action is boring it is telling us that a break-out is close at hand and that dips towards US310 look ok to buy.
 

 

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