Tuesday, November 3, 2009

Some contrary copper talk

There really isn't a commodity that hasn't gone up dramatically this year [edit: ok, I forgot about natural gas, it has dropped like a rock]  as a counter response to the dramatic fall in prices last year, a flood of central bank liquidity, and hopes for a strong worldwide rebound.  Copper has not disappointed.  At $3.00 / pound it is nearly back up to the $4 highs of 2008. 

Is this dramatic run up in copper prices justified? I'm beginning to wonder.  I began examining copper in an attempt to see if the inventory increases in oil were consistent with other raw materials.  Like oil, copper's inventories continue to rise worldwide.  As you can see from the graphs below inventories are steadily marching upwards worlwide. 

The graphs only go back 5 years but futher back inventories peaked (for COMEX + LME) at around 1,250,000 metric tons in 2002.  Copper was also around a buck a pound back then. Today the world is at at less than half that inventory figure.
What then is keeping copper prices so elevated? In the short term a serious equipment failure at BHP's Olympic Dam mine gave boost to copper and uranium prices.

I see two major longer term factors giving a lift to prices, the dollar and a mindframe of a recovering global economy.   The trend is also upwards and this market seems to be very much driven by technical trading more than anything else right now.  If the world economy does not rebound and the dollar stops dropping I think copper prices could rapidly reverse.

Right now I'm not really long or short copper or any copper producers, but I'm investigating further.  If copper inventories keep rising the bulls are going to have a harder time justifying prices at their current levels.

Simon Hunt has been extremely bearish on copper recently.

My skeptical view of the copper rally has also put me at odds with the Chinese pig farmer trading community

Many thanks to Sober Look for his assistance in acquiring some of this data.

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