It's gone up, up and up some more, but in the last couple of weeks there have been plenty of down days chopping in with the up days. That's the first time for a long time and for me is marking the top in Cu warehouse levels (on a there-or-thereabouts level).Desjardins wrote an interesting report on copper dated Jan 26th. Here's an extract from it:
The increase of exchange inventories over the past 6–7 months at a time when metal prices have trended higher has been a source of concern for many market watchers. This is especially true for copper (still perceived as the market leader). We should point out that copper inventories are still at historical lows, both in terms of weeks of consumption (current reported inventories represent 2.9 weeks of consumption compared with ‘normal’ levels of 6 weeks) and tonnage.
Furthermore, we are entering a period when inventories fall seasonally, ie exchange inventories tend to be drawn down during the 1H of the year—
There appears to be two reasons why inventories and prices have risen in tandem. Firstly, producers have stored metal in Asia in anticipation of a ‘pick-up’ in regional demand in 2010. We note that the copper inventory held at the LME warehouse in
Busan (South Korea) has increased from 1.0 KMT in mid-July 2009 to 99 KMT at present. Provided Asian demand picks up, particularly after the New Year holidays in mid-February, inventories in the region should start to fall. However, North America also holds a ‘key’ to the puzzle. Since mid-2009, worldwide LME and Comex exchange copper inventories have risen by 306 KMT or 96% to 626 KMT. Roughly 150 KMT (approximately half) of this increase has been metal entering North American warehouses. Of the 626 KMT currently held by the exchanges, 391 KMT is held in North America.
We understand that several market players believe the vast majority of metal entering the exchange warehouses in North America comes from producers—and particularly consumers—destocking their own inventory. This would make sense, given the collapse of copper demand in the US. We estimate US copper demand fell 24% last year to 1.57 MMT, the lowest level in decades. Furthermore, prices remained at historically high levels, placing further pressure on consumers/producers to run down their own inventory. Apparently, some market players are speculating that once it is clear that the US economy has stabilized and is on the road to improvement, consumers/producers will have to replenish their own inventory—driving down LME/Comex stocks and pushing prices higher. Consequently, in our view, for sustained high metal prices, there must be stabilization in the North American economy (at the very least) in addition to steady economic growth in China.
Worth thinking about with signals of a direction change in those inventories. Desjardins is bullish on copper and therefore frames its argument along a "when inventories come down, copper prices will be pushed even higher" argument. However, there is another possible here. What might happen is that prices drop first, and all those people hoarding copper (be they producers stocking to warehouses or Chinese pig farmers) will dump their inventories onto a demand-slack market. The result would be a serious downdip in the price of copper until the inventory had been moved, but probably only down on a shorter-term spike. Here we are, just one week after that Desjardins report was published and there's suddenly plenty of evidence around for that scenario.
Can you handle the rollercoaster? If you panic easily, maybe it's best to grab an ice-cream and watch from behind the safety barrier.