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18.03.2019

Copper Teeters on the Totter

Shy of a world economic collapse, I am a perma-bull on copper in the mid- to long-term. Despite strong
supply-demand fundamentals, the short-term price outlook for copper is equivocal; it seems to be
teetering on the totter.

Current price uncertainty for the entire industrial metals complex is due to the trade dispute between the
United States and China. China is by far the largest consumer of metals in the world with America way
behind in second place. Ambivalence with a slowing Chinese economy further weakened by the tariff
snafu is well-founded and has cast a pale over normally robust speculative markets for both hard and soft
commodities.

Additionally, hedge fund speculators largely abandoned the derivative markets for hard commodities in
Q4 2018 with the gross numbers of futures and options contracts at near-historic lows for both energy and
metal sectors.

This graph shows copper prices since Donald J. Trump was elected President of the United States in early
November 2016:

My recap follows:

  • Immediately upon Trump’s election, the copper price jumped 15 % and was volatile until his
    inauguration in late January.
  • Copper peaked in mid-February and was range-bound thru the mid-summer.
  • In late July of 2017, hedge funds went massively long and sent the price to multi-year highs that
    approached $3.30 in late December and then in mid-June of 2018. Then they suddenly went short
    en masse and copper prices fell to 52-week lows. The hedgies left the derivatives markets
    altogether in Q4 and stayed out of copper until accumulating short positions in January of this
    year.

Recent factors in the copper price equation include:

  • The “money men” (as per Andy Home of Reuters) are establishing small long positions in copper.
    They are motivated by apparent progress on trade talks and given China’s economic problems,
    anticipation of a new round of infrastructure stimulus.
  • Four-year lows for official copper inventories (Comex, LME, and ShEx) are starting to reverse.
  • China has been importing record tonnages of copper concentrates. There are ongoing smelter and
    refinery consolidations and build-outs that mirror China’s vast overbuild of aluminum refineries
    over the past five years.
  • Copper has been in strong backwardation over the past three weeks. LME warehouse warrant
    cancellations have accelerated, presumably to arbitrage currently higher spot prices.

Now let’s take a renewed look at the yearly seasonality of copper. We first addressed this subject with a
13-year treatment (Mercenary Musing, April 11, 2016). This table shows January opens and December
closes of spot copper over16 years. Bull years are defined as > +10% and shown in green; bear years are
< -10% and shown in red; and neutral years are shown in black:

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