Monday, March 23, 2009 Chinese Stockpiling Spurs Copper Price Rally

It appears the Chinese are back to their old games... you know - the game where they make a major buy of a specific commodity which sets hearts aflutter across the globe by those who use any uptick in commodity prices as a sign "the recovery is coming... any second now - get on the train or miss it! I don't care if it makes no rational sense - you have to buy ahead of the turn!". Just 6-7 weeks ago it was iron ore the Chinese were gobbling to restock [Feb 9: China and the Baltic Dry Index - What's Really Going On?] and now, according to the Financial Times it's copper. Ohhh, this one is much more sneaky - because as readers of the blog know Mr. Copper is considered the best economist out there. So all the world's hedge fund computers and trading desks look with mouths agape at copper rallying ... and now we have to find out it's just those sneaky Chinese. Again?! I do find it amusing that once again 87 data points point to an imploding global economy, but because 1 "sign" acts out of sort with all other evidence, folks desperate to put any trade on cling to it ... but that's human rationality. And as you can see, traders are indeed loving "thesis" (again)

Foooolin' - Def Leppard.

(Disclosure: I am currently temporarily short Freeport McMoran Gold & Copper (FCX) as of Thursday [Bookkeeping: Short Freeport McMoran Gold & Copper] so it would be in my interest to post stories about secret Chinese organizations buying copper, hence proving once again there is no imminent recovery that copper is signaling, and the rally is horse radish. Thankfully did my dirty work)
  • Copper stockpiling by a secretive Chinese state organisation has helped trigger an impressive rally of 28 per cent in the price of the metal this year.
  • Copper’s fortunes are closely tied to the industrial cycle so the price jump, bigger than that of gold, has grabbed attention outside the commodities market, with some questioning whether it could signal a turning point for economic growth.
  • However, developments in China, which accounted for almost a third of global copper consumption last year, remain central to the market’s prospects.
  • Industry reports point to buying by the Beijing’s State Reserves Bureau, which manages the country’s strategic stockpiles. SRB’s decisions are shrouded in secrecy, making it virtually impossible to assess accurately how much the Chinese government has bought. Traders estimate that the SRB is in the process of securing 300,000 tonnes and speculate that it could buy up to 1.2m tonnes this year. Global copper production last year stood at 18m tonnes.
  • David Wilson, metals analyst at Société Générale, said buying by the SRB has been the main driver behind rising copper prices.Real demand has played little part in the current copper price rally and remains notably weak as global manufacturing activity continues to decline,” he said, summarising a view widely held in the copper market.
  • The flow of copper into China has been clear as the stocks held in London Metal Exchange’s warehouses, particularly those in Asia, have fallen while inventories in Shanghai have increased.
  • Traders believe China is rebuilding its strategic stocks because the current price is less than half last year’s record $8,940 a tonne and also to support its struggling local copper smelters and avoid job losses.
  • Michael Jansen, metals analyst at JPMorgan, said copper would struggle to establish a foothold above $4,000 a tonne, a key level at which the majority of producers can operate profitably and also forward sell their future output. He viewed the current rally as a “clear selling opportunity.”

Disclaimer: The opinions listed on this blog are for educational purpose only. You should do your own research before making any decisions.
This blog, its affiliates, partners or authors are not responsible or liable for any misstatements and/or losses you might sustain from the content provided.

Copyright @2012