To follow up on my previous copper post here is some additional articles:
One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010 WSJ December 21, 2010
As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.
As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.
I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper. Ft.com December 21,2010
As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:
The November inflow was a surprise to many market watchers given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of last month, Beijing Capital Futures analyst Xiao Jing said.
And, as they also noted:
But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.
Bonded material can be shipped out to the international market easily or imported into China after the 17 percent value added tax is paid.
Finally, something I suspected but had no 'proof''. Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From Ft.com March 9,2011
To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
Magic.
That is, of course, until copper prices stop rising.
It's all fun and games until the party stops and the margin calls start. Just think about how much chicanery occurred during the US housing boom. You don't think games like that are being played in China?
Here's a video on the Libyan situation. France also officially recognized the Libyan rebels which could set up a situation where the frozen Libyan assets are released to the rebels. This would allows the rebels to arm themselves and get on with winning the civil war.
France recognized the Libyan opposition movement Thursday as the representative of the Libyan people, a former Libyan envoy said from Paris.Ali al-Issawi, the former Libyan envoy to India, announced in Paris that France recognized "the (Interim Transitional) National Council as the legitimate representative of the Libyan people," reports French news agency France 24.
Copper has had quite a run, but is it legit? Numerous experts are calling for continued strength in the commodity as well as continued supply deficits. I offer a contrary opinion.
There are several fundamental reasons for this alternate opinion and we'll go over them. From a technical standpoint copper as well almost all other commodities has been on a tear upwards ever since the announcement of QE 2. Recent events in the Middle East have slowed the rise in prices and higher oil prices may dent future economic growth worldwide so forces may be aligned to drive copper down in the near future.
Chinese Copper Demand
Copper is traded worldwide on several exchanges and as such provides an opportunity to see where prices (and by implication demand) are higher.
China is commonly cited as a source of continued copper demand. If this is so one would think copper sells at a premium to elsewhere in the world. This is not the case and copper has been selling at a discount to the LME (London Metal Exchange) for several months. As you can see here the last time couple times Chinese copper was cheaper worldwide prices stopped going up. (ht news-to-use.com )
One can see the real time arbitrage price difference on Bloomberg. While the arbitrage values do swing between positive and negative, since mid July the arbitrage price has been negative. Take a look at the long term trends and you'll see periods of negative arbitrage have coincided in the past with lower future prices as well as increasing inventory levels.
Inventories
One of the common bullish themes is how copper has been in a deficit for several years and will continue to be so in the future. A long term inventory chart provides some clarity. Longer term copper inventories have been both lower and higher than today. While right now copper inventories are dropping on a year over year basis the last inventory peak was in early February 2010 and as you can see inventories tend to trend in one direction or another for a period of several months. Right now we are on an upswing. Copper inventories (LME, SHFE, Comex) bottomed mid December and have risen nearly 130,000 thousand tonnes since then and are rising at over one thousand tonnes a day right now.
Furthermore the number of cancelled warrants continues to drop and has remained well below 20,000 for several weeks now. A low cancelled warrant number is an indication of fewer lots of copper coming out of inventory for delivery.
The dog that did not bark
A most interesting news article ran across Bloomberg late last year regarding Shanghai and bonded warehouses.
Why provide this option of delivering copper from 'non official inventory' warehouses if it did not already exist? While getting hard numbers about how much hidden inventory exists is nearly impossible, this rule change leads one to believe there is significant supply available, otherwise why provide the option?
Furthermore the 'movement' of inventories into and out of the official stockpiles occurs rather easily. In January aluminum inventories went up 100,000 tonnes in one day. http://traderightuk.wordpress.com/2011/01/10/now-you-dont-now-you-see-it/ 100 thousand tonnes is a LOT of material. The largest ships in the world move 150 thousand tonnes of cargo to give you a sense of the mass involved.
Just because you can't see the copper (or aluminum) doesn't mean it is not there. There are other quantitative numbers showing us there is a lack of demand in China such as the the lower relative price as well as a lack of imports.
Both refined and scrap copper imports have leveled off over the last few years and do not show a sustained rise in imports as one would expect if China is truly the voracious eater of copper as people have posited.
Four dollar copper does wonders for encouraging more supply. Heck, there's even supply developing underwater. Nautilus minerals is currently building an underwater 'mine' and if they can pull it off the potential is huge.
Furthermore a little corruption goes a long way. There's a 17% VAT tax on copper in China. Does one honestly believe there is no skirting of the law? A truckload of copper would be an easy thing to 'misplace' at a large import facility.
Betting against the house
Looking at copper futures over the past several years one can see (green line) how commercial traders have never been this short as they have been during this recent run up in price. Remember when you are buying copper right now the person selling probably has more information about copper prices than you do.
Avoiding Imperial Entanglements and Bernankflation
Almost all commodities have been on an tear upwards since Ben Bernanke announced QE 2 in late 2010. The results have come home to roost however as higher food prices may have been the spark that set off the political unrest in the Middle East. Higher oil prices from the riots and regime change in Tunisia, Egypt, and Libya have people wondering who is next and what will that do to oil supplies. Oil prices are now well above $100 a barrel and that price shock has yet to be fully realized throughout the world economy. To hedge my short base metals position I'm also long precious metals and this combination has worked out well recently. Continued tension in the oil producing nations will most likely keep gold rising and depress copper prices as people grow concerned about future economic growth.
Alternative learning annex
For those of you who can't stand looking at data and trying to understand the nuances of localized supply and demand I have created a short video explaining the high points of this post.
NPR recently spoke about how oil is not created equal. There are differing types of oil, with some having higher sulpher content as well as other parameters making it easier or harder to refine into the higher quality fuels.
"It happens that Libyan crude has almost no sulfur and produces a great deal of diesel fuel per barrel of crude, which means it is very valued," he says. "One can think of it as fat-free milk."
Libyan oil is light and sweet — it's the kind that refineries want for making low-sulfur diesel, which is widely desired in Europe, and jet fuel, of which the U.S. makes a lot. Both markets require low-sulfur fuel because it pollutes less.
It's a short (<4 minute) introduction to some of the intricacies of the energy markets and I suggest you listen to it.
A recent Wikileaks article has exposed the Chinese mentioning their large holdings of US Treasuries while in conversation with the US as a not so subtle hint to back off on various international activites by the US, specifically selling arms to Taiwan.
From AFP (2011, Feb 21)
China's clout -- gleaned from its nearly $900 billion stack of US debt -- has been widely commented on in the United States, but sensitive cables show just how much influence Beijing has and how keen Washington is to address its rival's concerns. An October 2008 cable, released by WikiLeaks, showed a senior Chinese official linking questions about much-needed Chinese investment to sensitive military sales to Taiwan.
"In that regard, the recent announcement that the United States intends to sell another arms package to Taiwan increases the difficulty the Chinese government faces in explaining any supporting policies to the Chinese public."
His comments came days after the Pentagon notified Congress it was poised to sell $6.5 billion worth of arms to China's arch rival Taiwan.
China's massive holdings of US debt have not escaped the public's notice either. Even Saturday Night Live spoofed the relationship. (email readers may need to click through to see the video)
My response to China:
Bring It.
I dare you. I double dog dare you.
One must ask how the Chinese have amassed such a huge wad of our currency and thus our debt when considering my dare to the Chinese. In short, the Chinese forcibly keep their currency undervalued by constantly intervening in the exchange markets. They are doing so to keep their exports 'cheap' and their export factories busy. They need invest all those US dollars in something so they end up in our Treasury bonds and bills. Their huge holdings of our debt is a direct result of their mercantilist trade policies.
If the Chinese do not want to keep buying our debt the can very easily do so by not intervening in the currency markets, but I doubt they will do so in a dramatic fashion. Their low skill low wage factories cannot compete without an under priced currency. The Chinese are slowly raising the Yuan but it is a challenge for them to wean themselves off the Faustian bargain they created.
Paul Tudor Jones of Tudor investments dedicates 14 pages to a discussion as to how the undervalued Chinese Yuan has created severe imbalances worldwide. I suggest you read the whole letter Mr. Jones' letter (2011 Feb 14)
Failure to address this issue - as one of the primary causes of the intractable unemployment currently plaguing the US -- has led to a series of second-best policy options . . . Indirectly, the peg has exacerbated the United States' large fiscal deficit while enabling our elected officials to delay the difficult spending adjustments that are inevitable.
So China, yes, you can threaten to stop buying our Tbonds. We would pay a little more for our home mortgages but it would also staunch the flow of manufacturing jobs out of America. You however would see a massive number of people thrown into unemployment and most likely a repeat of Tiananmen Square.
Here's a documentary on North Korea's propaganda machine and the people trained to fill it. Remember the kids you see are some of the elite. Unfortunately I doubt the current wave of revolutions will break the bulkheads on this repressive country.
There are small scale operations attempting to tell the citizens of North Korea what really going on but I doubt it will amount to much at this level of intensity.
This weekend has been an eventful one for the world geopolitically and this week will see further events which shape the stage. The riots in Libya and continued unrest throughout the Middle East had a dramatic affect on futures markets today as the regular markets were closed.
The events in Libya are obviously in flux and getting hard news out of the country is difficult so the rumors and actual news will be mixed together and hard to clarify.
The affect on the markets today (Monday) was dramatic:
While the rioting is getting the headlines the trouble in the Eurozone continues its slow burn. Ireland is holding elections this week and the party currently in power is predicted to be handily spanked in the polls. The mood in Ireland is not good and there is some talk of repudiating the guarantee of the government honoring all senior bank.
Tomorrows markets will be very interesting to watch. Oil prices are getting to a point where they are seriously hitting the consumer's pocketbook and another spike in oil (like the one in 2008) could seriously stress the already weak US consumer. I'm not evening mentioning China and their continued raising of interest rates / reserve ratios. That's for another time.
