Copper Surges Over US$5,000/Ton Despite Less Than Stellar Data

July 19, 2016 

Jim Williams

Copper traders seem oblivious to the fact that data released in China last week show copper imports fell 2.3% from a month ago. One reason China may have seen a drop in copper imports is because it has become more attractive financially to store copper in a London Metal Exchange (LME) warehouse.

Analysts estimate a trader could receive warehouse incentives of US$50 – US$60 a ton to store the metal, against a premium in Shanghai of a flat US$52.5 a ton.

Copper sitting in warehouses licensed by the LME has jumped 18% over the last week to the highest level since February, totalling 234,750 tons. That’s up from 140,000 tons in April.

Many investors fear the inflow of the red metal could weigh on copper prices, which rose Wednesday to above $5,000 a ton for the first time since April. The spike was fuelled by expectations of further stimulus from central banks.

“Easing rates will likely support metal prices in the short term as it will boost risk appetite for investors,” Mitchell Hugers, a commodities strategist at BMI Research, told the Wall Street Journal. “China’s strong year-to-date copper imports will prove unsustainable, as the country’s demand growth fails to keep pace with output growth,” added Hugers.

Frequent contributor Andrew Hecht chimes in on the inventory situation, “One of the reasons that copper, the critical base metal for building infrastructure, was the poorest performing base metal in Q2 is that China continues to have significant inventories within their borders. The world markets have discounted slow Chinese economic growth. Even marginally positive data from the Asian nation could cause commodity prices to explode higher in the current environment.”

You can read all of Andrew’s thoughts on commodities breaking the summer trend in 2016 in his Seeking Alpha article: http://seekingalpha.com/article/3987271-commodities-summer-doldrums-count. Investors point to another reason for the spike in copper this week being the prospect of solid growth in the U.S. and a slightly calmer effect in major markets as the dust continues to settle after the implosion that was Brexit.

“There’s been a definite risk-on tone which has been driving markets,” said analyst Daniel Hynes of ANZ in Sydney. “In base metals, the market is definitely taking a glass half full approach at the moment and it’s probably a bit premature, given concerns over China’s growth and the questions over rising inventories.”


Jim Williams is a columnist for tED Magazine, where this article first appeared, www.tedmag.com.

 

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