LME inventory remains extremely low by historical standards, equivalent to only two days of global usage.
But this is not just an LME phenomenon. Registered stocks at both the CME and the Shanghai Futures Exchange (ShFE) are also very low, and the three exchanges combined hold just 200,000 tons of metal.
The bullish stock outlook doesn’t sit well with the market’s bearish humor. LME three-month copper is currently trading around $7,715 per tonne and is down 21% in early 2022 as the market worries about slow economic growth in China and possibly no growth in Europe.
The discrepancy between visible inventory and price is causing time constraints on all three exchanges and renewed analyst interest in trying to calculate hidden copper inventories.
All you can see…
Registered tonnage at the big three copper exchanges totaled 195,560 tons at the end of August, up slightly by 5,450 tons in early January, but down by 185,650 tons in August last year.
So far this month there has been little change, the slight increase in LME inventories offset by continued withdrawals from CME warehouses in the US.
A broader copper stock picture can be constructed by incorporating two relatively recent data series.
In February 2020, the LME introduced a monthly “shadow inventory” report, denoting over-the-counter metal stocks but with explicit contractual reference to the LME delivery option.
2020 and early 2021 saw significant amounts of such copper outside the warrants. At their peak of 175,000 tonnes in February last year, they dwarfed the registered LME copper inventory of 74,000 tonnes. Since then, however, they have dwindled to just 17,000 tons by the end of July.
The Shanghai International Energy Exchange (INE) launched its international copper contract in early 2021 and since then has published weekly figures on bonded warehouse stocks held against the contract.
They are currently at an impressive 89,000 tons and have grown by 23,500 tons since the beginning of January.
Registered exchange stocks combined with LME shadow and INE bond stocks represent the entire statistically verifiable copper stock landscape.
Combined stocks were just under 330,000 tonnes at the end of July, up from 61,000 tonnes in the first seven months of the year but 159,000 tonnes below July 2021 levels, still just five days of global usage.
…which you can’t see
There is obviously more copper “out there” in the statistical obscurity.
Half a million tons of it, according to analysts at Citi, who “believe market-implied convenience yields can show us what we can’t see.” The futures curves are pricing around 500,000 tons of invisible stock outside of China, the bank estimates. (“Metals Weekly,” September 16, 2022).
Citi, which expects copper prices to fall to $6,600 in the first quarter of next year, argues that there is “a reasonable inventory buffer to bridge the gap between now and a more pronounced fall in demand as a potential recession in Europe looms in the middle of the year.” The course of winter plays out months”.
However, as Citi itself acknowledges, there are important caveats to this type of calculation. The LME futures curve can price in all types of hedging flows, including temporary build-ups in Chilean port inventories, shifts in Chinese bond inventories, and delays in metal transportation.
The problem is knowing how much of the implied inventory is available rather than going direct to a manufacturer.
There are two other complications in the current mix.
Russian copper is not officially sanctioned, but self-sanctioning can already disrupt the normal channels for the flow of physical metal into the European market.
Chinese retailer Maike Group, meanwhile, is in talks with state-owned companies after running into financial difficulties.
Maike is one of China’s top copper traders, importing around a million tons a year, and the financial support could trigger physical market waves.
Both Russian and Chinese metal events are also likely to take place in LME timeframes, which in turn affects the calculation of the convenience curve.
Time spreads can also be an extremely volatile barometer, especially when only a few stocks are covered by physically deliverable contracts.
The LME premium for three-month cash deliveries rose to $150 a tonne last week and is still trading around $55 despite strong copper deliveries on warrants on Tuesday.
The CME curve is also being roiled by a mini-squeeze, with the Sep-Dec spread breaking out above 5.4 cents a pound last week and last trading at 4.4 cents, equivalent to $97 a tonne.
CME inventory, which is concentrated in Salt Lake City, Tucson and New Orleans, has been steadily declining since June and is now down 31% to 41,471 tons at the start of the year.
ShFE-registered stocks are even lower at 35,865 tonnes, which has resulted in steep backwardation across the Shanghai curve to the April 2023 contract.
The current bearish thinking is that there will be plenty of metal as Europe enters recession and China struggles to escape the constraints of lockdowns and the collapse of the real estate sector.
Until then, however, extremely low stocks on all three exchanges will continue to generate spread volatility until what is “out there,” however high, is moved to a place where it can be counted.
(The opinions expressed here are those of author Andy Home, a columnist for Reuters.)
(Edited by Jan Harvey)