Some good thoughts from Waverly Advisors on the state of the copper market, and why the metal’s most likely direction is downward.
The basic idea: inventories (stocks) remain high, China is definitely in tightening mode, and the US economy will cool in the second half.
Here it is more spelled out.
Stock levels continue to decline, though mildly: LME stock levels, have
continued to trend downward in recent months, although they remain high
by historical standards (see chart below). Shanghai copper stocks fell 8,045
MT from last week to 173,095 MT, with 9,715 MT withdrawn and 1,670
Chinese Tightening Continues: There is increased speculation that China will
tighten rates after CPI for April registered at 2.8%, with short term
SHIBOR levels trending upwards slightly last week. Last Wednesday The
National Development and Reform Commission released a report predicting
that the prices of industrial goods in general may decline in the next two
months with Copper specifically fluctuating in a larger range than Steel as
cooling demand for residential and industrial construction are offset by
seasonally peak May/June industrial orders.
Scrap Market Indications: Anecdotal reports indicate that US scrap dealers
have been holding back inventory in recent weeks looking for stronger
pricing (lower grade scrap traded down last week).
Photo: Waverly Advisors
Although our strategic view for copper remains largely unchanged from February, macro signals that continue to be deflationary on balance domestically (despite recent signals of strength in ISM price data) and our expectations for moderating US growth in the second half have increased our convictions for this reentry.
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