LME inventory remains extremely low by any historical metric, representing only two days of global use.
But this is not just an LME phenomenon. The inventory registered at both the CME and the Shanghai Futures Exchange (ShFE) is also very low and, between them, the three exchanges contain only 200,000 tons of metal.
The bullish view of the stocks does not fit well with the bearish humor of the market. Currently trading around $ 7,715 per tonne, three-month LME copper is down 21% in early 2022 as the market is concerned about slow economic growth in China and potentially no growth in Europe.
The disconnect between visible inventory and price is generating time rigidity across all three exchanges and renewed interest from analysts as they attempt to calculate hidden copper stocks.
All you can see …
The tonnage recorded with the three big copper exchanges amounted to 195,560 tons at the end of August, up by 5,450 tons marginal in early January but down 185,650 tons in August last year.
There has been minimal change so far this month, the slight increase in LME inventory offset by continued picks from CME warehouses in the US.
A broader picture of copper stocks can be created by including two relatively new datasets.
In February 2020, the LME introduced a monthly report on “shadow stocks”, which denotes the metal stored off-market but with explicit contractual reference to the LME delivery option.
There were significant quantities of such copper out of warranty in 2020 and early 2021. At a peak of 175,000 tons in February last year, they dwarfed the LME copper inventory recorded by 74,000 tons. However, they have since shrunk to just 17,000 tons at the end of July.
The Shanghai International Energy Exchange (INE) launched its international copper contract in early 2021 and has since released weekly data for bonded warehousing stocks held against the contract.
They currently stand at a substantial 89,000 tons and have grown by 23,500 tons since the beginning of January.
Registered stock exchange stocks combined with LME shadow stocks and INE bond stocks represent the total landscape of statistically verifiable copper stocks.
The combined companies were just under 330,000 tons at the end of July, an amount of 61,000 tons in the first seven months of the year but 159,000 tons below where they were in July 2021, and still only equivalent to five days of global use. .
… What you can’t see
There is obviously more copper “out there” in the statistical darkness.
Half a million tons of it, according to Citi analysts, who “believe the implicit economic returns in the market can show us what we can’t see.” Future curves are valuing around 500,000 tons of invisible stocks outside of China, the bank estimates. (“Metals Weekly”, September 16, 2022).
Citi, which expects the price of copper to drop to $ 6,600 in the first quarter of next year, argues that there is “an adequate buffer of stocks to bridge the gap between now and a more pronounced slowdown in demand as a potential recession in Europe unfolds. during the winter months “.
However, as Citi herself admits, there are important caveats to this type of calculation. The LME futures curve can price all types of hedging flows, including temporary constructions of Chilean port securities, Chinese bond shifts and delays in metal transit.
The problem is knowing how much of the implicit stock is accessible rather than going directly to a manufacturer.
There are two other complications in the current mix.
Russian copper is not officially sanctioned, but self-sanctioning may already disrupt the normal channels for the flow of physical metal into the European market.
Chinese trader Maike Group meanwhile is now in talks with state-owned companies after encountering financial difficulties.
Maike is one of China’s leading copper traders, imports around one million tons per year, and the exercise of financial support can generate waves of the physical market.
Russian and Chinese metal events are also likely to take place in the LME time differentials, which in turn will affect the computation of the convenience curve.
Spreading the tension
Time differentials can also be an extremely volatile barometer, particularly where there are few securities covered by physically deliverable contracts.
The LME award for three-month cash delivery jumped to $ 150 per ton last week and is still trading around $ 55 despite heavy copper deliveries in warrants on Tuesday.
The CME curve was also rocked by a mini-squeeze, the September-December spread rose to over 5.4 cents per pound last week and the last one was trading at 4.4 cents, equivalent to $ 97 per ton. .
CME’s inventories, which are concentrated in Salt Lake City, Tucson and New Orleans, have been steadily declining since June and are now down 31% earlier this year to 41,471 tons.
Inventories recorded by ShFE are still below 35,865 tons, which has led to a sharp retreat along the Shanghai curve until the April 2023 contract.
The current bearish thinking is that there will be a lot of metal lying around as Europe falls into recession and China struggles to escape the difficulties of the spinning blocks and the founding of the real estate sector.
Until then, however, super low stocks across all three exchanges will continue to generate spread volatility until what is “out there”, however much it may be, is moved to a point where it can be. counted.
(The views expressed here are those of the author, Andy Home, a Reuters columnist.)
(Edited by Jan Harvey)