Commodities | Dec 01 2009
By Chris Shaw
Physical copper market conditions have been in decline in recent months as inventories have jumped by 130,000 tonnes or 40% since the beginning of September but this trend hasn’t impacted on prices for the metal, Barclays Capital noting the London Metals Exchange (LME) copper contract has risen by 13% over the same period.
The contrast between stocks and copper prices has led some in the market to suggest the metal price is being driven by liquidity at present, though Barclays suggests there are a number of facts that counter this view. For starters, if it was liquidity driving the price there should be a corresponding increase in trading volumes but as the group points out this has not been the case.
As well, price performance across the base metals sector has been differentiated, with nickel falling of late compared to the other metals. Such price activity doesn’t support the view it is unspecified inflows of investment money pushing prices higher according to Barclays.
This suggests factors more specific to the copper market and taking a closer look Barclays points out copper’s fundamentals have been supportive of higher prices as there have been supply disruptions significant enough to suggest a tightening in the concentrate market and subsequently reduced refined metal supply.
Economic data have also been better than expected of late, Barclays noting this has contributed to a discounting of a more optimistic recovery into prices on the market. This and the supply side issues have been priced into the curve as there is a modest contango structure running out 14 to 15 months for LME contracts. A contango exists when futures prices for delivery of a commodity are higher than current spot prices.
At the same time any build in stocks has been countered by improving demand, Barclays pointing out this means there has been little or no upward change in the global stock-to-consumption ratio. This remains relatively tight at three weeks, so making prices more sensitive to any indications of future market tightness.
Barclays conclusion is the copper price gains of recent weeks are justified by the fundamentals for that metal, meaning the the more general “liquidity-based” arguments offered by some market participants to explain the gains are misplaced.