LME stock remains very low by any historical scale, accounting for only two days of global use.
But this is not just an LME phenomenon. The stock listed on both the Chicago Mercantile Exchange and the Shanghai Futures Exchange (ShFE) is also very low, and between them, the three exchanges contain only 200,000 tons of the metal.
The bullish stock optics don’t align well with the bearish humor of the market. Copper is currently trading around $7,715 a ton, and three-month copper on the London Metal Exchange is down 21% at the start of 2022 as the market fears slow economic growth in China and the prospect of no growth in Europe.
The separation between visible stock and price is narrowing the time scale across all three exchanges and renewing analysts’ interest in trying to account for hidden stocks of copper.
All you see…
The total recorded tonnage of the three major copper exchanges was 195,560 tons at the end of August, a marginal increase of 5450 tons at the beginning of January but a decrease of 185,650 tons in August of last year.
There has been little change so far this month, the slight rise in LME stocks offset by the continued withdrawal from CME warehouses in the US.
A broader picture of copper stocks can be created by including two relatively new data series.
In February 2020, the LME submitted a monthly report on “shadow stocks”, indicating metals stored outside the market but with an explicit contractual indication of a delivery option on the LME.
Significant amounts of this copper were out of warranty in 2020 and early 2021. At its peak of 175,000 tons in February last year, the 74,000 tons LME-listed copper stock dwindled. However, it has since shrunk to only 17,000 tons as of the end of July.
The Shanghai International Energy Exchange (INE) launched its international copper contract at the beginning of 2021 and has since published weekly figures for customs warehouse stocks held against the contract.
It currently has a volume of 89,000 tons and has grown by 23,500 tons since the beginning of January.
The trade-in stocks listed along with the LME shade and the bonded stocks from INE represent the total statistically verifiable copper stock landscape.
Combined holdings were just under 330,000 tons at the end of July, up 61,000 tons over the first seven months of the year, but 159 thousand tons less than in July 2021, still equivalent to just five days of global use.
…what you can’t see
There is clearly more copper “out there” in the statistical darkness.
Half a million tons of it, according to analysts at Citi, who “believe that implied fit market returns can show us what we can’t see.” Futures curves put about 500,000 tons of unseen stocks outside of China, the bank estimates. (“Metals Weekly”, September 16, 2022).
Citi, which expects the price of copper to fall to $6,600 in the first quarter of next year, argues that there is “appropriate buffers to fill the gap between now and the more pronounced demand slowdown with a possible recession in Europe during the winter months.”
However, there are important caveats to this type of account, as Citi itself admits. The LME futures curve can quote all types of hedging flows, including temporary accumulations of Chilean port balances, shifts in Chinese bonded stocks, and delays in the transportation of minerals.
The problem is figuring out how much implied inventory can be accessed rather than going straight to the factory.
There are two other complications in the current mix.
Russian copper is not officially subject to sanctions, but the self-sanctions could actually disrupt the natural channels of the physical metal’s flow to the European market.
Meanwhile, China’s Maike Group is now in talks with state-owned companies after it ran into financial difficulties.
Mike is one of the top copper dealers in China, importing about 1 million tons annually, and exercising financial support could generate actual market waves.
Russian and Chinese metal events are also likely to occur in the time margins of the LME, which in turn influences the fit curve calculation.
spread the tension
Time differences can also be a very volatile measure, particularly when there are few stocks covered in physically deliverable contracts.
LME’s premium for cash on three-month delivery rose to $150 a tonne last week and is still trading around $55 despite Tuesday’s massive copper deliveries under order.
The CME curve is also affected by a small pressure, the September-December spread came to more than 5.4 cents per pound last week and last traded at 4.4 cents, equivalent to $97 per ton.
CME stock, which is concentrated in Salt Lake City, Tucson and New Orleans, has been sliding steadily since June and is now down 31% at the start of the year at 41,471 tons.
Recorded stocks in ShFE remain low at 35,865 tons, which led to a sharp pullback across the Shanghai curve during the April 2023 decade.
The current bear idea is that there will be plenty of metal around Europe as Europe falls into recession and China struggles to escape the shackles of rolling shutdowns and the property sector falters.
Until then, very low stocks on all three exchanges will continue to generate spread volatility until such time as what “is” there, whatever it may be, is moved somewhere to be accounted for.
(The opinions expressed here are those of the writer, Andy Home, a Reuters columnist.)