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On The Coming Collapse Of Copper
18 months ago we first brought the world's attention to the end of what has now been exposed as among the largest ponzi schemes in history - the Chinese Commodity Financing Deals (CCFDs) - pointing out how this meant commodities like copper were likely to come under pressure as firms liquidate what minimal holdings they had (and sell out futures hedges) to manage the risk of unwinds in these quasi-collateralized deals. Since then, copper prices have indeed plunged, as has global growth expectations and global bond yields as a realization that 'demand' implied by previous prices was entirely artificial. Now, as Goldman notes, the real world is catching up (or down) to the reality of mal-investment and how copper is set to drop notably further...
As Goldman Sach's Max Layton,
Metals and mining commodities – including the base and bulk commodities, steel and cement – are highly exposed to a slowdown in the Chinese property, with over 40% of Chinese demand for cement and copper in particular consumed in the construction sector. The recent slowdown in Chinese property sales, prices and early-cycle new starts has most impacted physical demand for (and sentiment towards) commodities exposed to the earlier stages of China’s construction cycle – steel and iron ore – which have underperformed commodities more exposed to latter stages of the construction cycle, such as copper. However, as the recent slowdown in new starts flows through to late-cycle, copper-intensive construction completions, we expect copper to come under further pressure.
Understanding the construction cycle and commodity demand
The property development timeline for a typical Chinese building (such as an apartment building) from new start to property completion takes around 18 to 24 months. An “early-cycle” construction phase can be characterized as a period with strong new starts, relatively weak completions, and falling inventories (associated with higher sales). Conversely, “late-cycle” construction phases are typically associated with weak new starts, relatively strong completions, and rising/and or high property inventories (associated with weak sales). The intensity of basic material consumption varies significantly across these phases: consumption of steel and steel-making raw material (such as iron ore and coking coal) tends to be strongest in the earlier stages, while copper tends to be consumed in the later stages.
Specifically, as much as c.61% of Chinese and c.25% of global copper consumption is related to Chinese housing and property activity. Of the c.61% of Chinese consumption that may be related to property, up to c.45-50% is directly associated with project completion (plumbing, wiring for lighting, local power infrastructure, telecom, etc.), and c.12% is associated with the actual property sale, when the property is fitted with copper-intensive consumer appliances and/or tiling intensive in mineral sands. The strong link between completions and copper demand owes to the fact that internal and external copper wiring (for connection to the grid) tends to be installed around project completion. There is strong empirical evidence for the relationship between completions strength and copper prices: using completions as the primary indicator of China’s copper demand, together with ex-China demand data, explains the vast bulk of variation in copper prices over the past decade.
Bad news for copper
In 2012/2013, the Chinese construction sector transitioned from an early-cycle construction phase to a late-cycle one, as completions surged following a wave of new stimulus-related construction post the Global Financial Crisis. Since then, the cycles have been relatively muted, with both new starts and completions growing sub-trend, for the most part. More specifically, the observed weak growth in new starts over the past two years has bearish medium-term implications for late-cycle copper-intensive construction completions. In our view, this weakness has not been priced in, as it has not flowed through to the physical market via higher inventories, and therefore supports our bearish copper view over the next year ($6,600/t and $6,200/t at 6- and 12-month horizons).
Double whammy (at the margin): commodity financing deals
In the past three years, China has increasingly employed complex commodity financing deals to import relatively low-cost US dollar funding, which in some cases has likely been used to fund property development. While the profitability of these financing deals has already fallen owing to lower Chinese interest rates, higher rates outside of China, and – in the case of copper – persistent LME backwardation, we expect a further gradual unwind in such deals over the course of 2015 as China opens up its capital account gradually over time. This broader reduction in financing deals, combined with an expected rise in US interest rates, could result in higher costs of funding for Chinese property developers, potentially further slowing property starts and property-related commodity consumption. At the same time, a further reduction in deals would reduce demand for copper imports into bonded warehouses in China (a key component of the financing transactions), potentially raising inventory visibility outside of China. This scenario would be a double whammy for copper, which is both highly exposed to the property sector and supported by low visible exchange stocks.
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Exactly the same for CRUDE OIL
Time for that copper counter-top, and brass fittings, and doorknobs, and pulls, to reduce the spread of (bacterial) infection.
not copper brass. coper rusts to form a nice green patina which is not hostile to bacteria. brass ( which includes the copper in it) does not.
On the coming collapse of gold and silver.
Is it just me or did no one pick up on the fact GS was "bearish" copper? How many muppet sequels are there? I guess it really ain't easy bein' brochanite (sulfate humor).
Queue kermit in the gutter pic...in 3,2,1.
Copper can be recycled, crude not so much. Both prices will go down, but copper will take a worse beating
We are practically in a commodity based financial system, as far as shadow banking is concerned
Not yet, but possibly very soon we will see a huge shift. A recent article presented to me delved into the subject of high earning Americans and where their wealth came from. The really big earners in recent years have benefited greatly from the surging stock prices as much of their income has come from financial markets and gains in equities. Many people seem to think this is the hope of our future.
When you have more than you need or want to put money away for a rainy day where do you store it? If you rated people on a "wealth chart" by how many tangible assets they owned you might be shocked to find much of the wealth people own is in paper and this is full of risk. It could be said that "paper wealth" is merely a promise of future value. Unfortunately, this leaves much of society and many rich individuals vulnerable to rapid financial loss if the tides of fortune shift or if values rapidly change. More on the subject of how and where wealth is stored in the article below.
http://brucewilds.blogspot.com/2014/08/where-wealth-is-held.html
"Many people seem to think this is the hope of our future."
There is no hope
growing income inequality assures that. I could write a book, but heres the distilled version:
Warren Buffet can only buy so many shirts
Looking at the entire commodities market, things are falling apart. All the paper in the world isn't going to make a difference but the sheep have been trained to follow the rustle of paper and don't understand that gas does not magically come from the pump and food doesn't just appear at the supermarket. Being a slope foreheaded, inbred redneck from fly-over country I actually get to see the wells and farms and know that if humanity keeps fucking up it will all go away. Almost everybody on this site bitches and moans abbout what THOSE OTHER PEOPLE are doing to the economy but stacking pM's and BTFD won't save your ass from starving in the freezing darkness....so what are you going to do to save your own ass?
Yet again with your POS blog. Because your puerile ramblings just never get old...
copper is byproduct of gold mining. Collapse in copper price will make gold mining difficult. So gold once again will rise.
So China is a massive PRODUCER of copper too. This is true of coal and interestingly of quite recently oil as well.
This is a communist country. The primary goal of any communist regime is to always produce MOAR. Same is still true in Russia I might add.
This is why there is always a lower price in commodities....including gold.
The big problem comes when you leverage the State itself for said interests.
That's a lot of people to pay off before you can get pricing power.
Back in 2009 china was on the fiscal stimpack bandwagon
$600 billion worth
their economy export/mercantile driven. You would think the $$s went to improving (non existent) safety net. You would be wrong. The $$s went toward infrastructure, factories, etc.
the last thing an over capicity world needed ... more capacity
We'll be importing deflation
@ Zerozulu:
Let's see if I understand, I have a gold mine, I can take a few grams of gold and a few tons of copper?
His speech is very interesting, tell me where this happens I'll buy mine said.
hehe.
Just a like a thousand years ago when fiat currency was birthed to facilitate the Chinamen's first CCFD ponzi schemes... Copper will collapse if the Chinese allow it to collapse, but they need only a pen, paper and signature to fundamentally change the equation, not just domestically.
Yes and the solution will turn out to be the same as it was then. Only this time we have nukes, for the really big show.
It might turn out different this time, given the stated ambitions of certain Russian elite in terms of currency paradigms and the desire of The Party in China to maintain the domestic status quo. At the same time the Chinese are much better at copying than innovating, so that weighs against.
However, the eloquent simplicity of the solution to several current problems combined the with the strategic PROGRESS! towards several future goals make it an interesting proposition.
But there is also the issue of Austrians and Krugmans popping simultaneous boners... Human sacrifice! Dogs and cats living together! Mass hysteria! So perhaps- Rinse, Repeat is preferable?
But without having access to PBoC's internal data as to whether the maintenance of existing collateral value at current price, or obtaining (missing) collateral at reduced prices is a larger concern, it is impossible to determine whether it more than just an interesting proposition, precisely because the status quo must be maintained.
my friend's step-sister makes $67 every hour on the computer . She has been fired from work for 7 months but last month her pay check was $14130 just working on the computer for a few hours. blog here... www.Yelptrade.com
Copper's so cheap it's not even worth stealing out of abandoned houses any more.
Buck a pound was the 1999 low.
We are heading there too.
Even lower in my view.
copper futures bottomed out around 63 cents. or just over $1400 per tonne. right now it is 5 times that price after peaking at over 7 times that price a few years ago. i pay a guy a lot of money every year to tell me about copper and china. very little copper is being used in furnaces. most going into finance. much much copper outside the reporting system. strong hands in china want to see the price higher. it will be interesting to see if they can make it so. copper is anythin but a free market dominated by its fundamentals. it is highly manipulated.
point is, i would ltake the goldman analysis with a very large pile of salt. likely talking someones book and will probably be taking the other side of the trade.
Copper Ore grades have dropped 40% in the same time period, meaning they have to mine almost twice as much ore to get the same production numbers. Half the world's population needs running water and electricity, you going to short that?... look at the copper Copper/Gold ratio; same as it ever was.
http://www.infomine.com/investment/price-ratios/copper-gold/15-year/
Exactly the same for the United States!!!!!
Now if Eboma could just the Wookie' ass to collapse. I mean, damn!...looks like she has a teleprompter stuck up there.
http://lh3.ggpht.com/-ftU4Ri4g24g/VEpOulxWwNI/AAAAAAABO9Q/tB8gvUsanrA/s1600-h/mo%252520the%252520butts%252520have%252520it%25255B15%25255D.jpg
Lol that has to be photoshopped or implants....
Her arse reminds of the robot maid on the Jetsons.
Rosie. or Rosie.
But, more likely, Reggie wasn't available one night and Obola broke his stick off in her bung hole and she never noticed the difference, and its been there ever since lifting the back of her dress in some perverted fashion.
@ Nmewn:
People who do Faculty of Physics or Mathematics know the formula:
It's more or less the following:
According to the size of the ass you calculate the pressure per cubic centimeter at Dick head.
hehe.
I figure with an ass that big you'd need two by fours just to keep from falling in.
It's not the bulge in the back creeps me out.
IT sounds like it may be a good time soon to buy that property I want in Chile.
I thought the FRN was the biggest ponzi..
Calling Dr. Copper
The world has become much more efficient at using copper. As a contractor i will tell you they have taken the metal out of everything and as prices have gone up more is recycled. Copper prices will indeed be falling.
This ( as ZH points out ) has been going on for a while.
I wonder;
Buy on rumor, sell on news???
Perhaps this is the "news"???
Maybe the trend is closer to a bottom than the top?
the oncoming recession disagrees
oncoming, or ongoing?
good question
the ongoing one will be partying with the oncoming (aka "official") one
QE/ZIRP disinflationary ... deflationary when asset bubbles burst (we're at onset)
Well, deflation is going to be path...for all commodities. And PM's too, at least for awhile yet.
It's like the economy is trying to tell us something...After what we've done to the system, our money is crap. All our assets, which we inflated so as to skim off the added value, are not worth but a fraction of their current "price". So, the economy is driving down those prices to show us the reality. To say, "See? THAT'S what your crap is worth!" We might actually manage to get through this, if we'd show a little humility, accept the verdict, and deflate the damned thing.
But TPTB won't allow the prices to fall, not without a fight, except for those PM's...Those are the 'watchman' commodities, whose true values, when allowed to move freely, put all others into proper perspective. As long as gold and silver remain "cheap", our fiat-based assets look more valuable. However, when gold and silver begin their inevitable rise to their proper level, as they always HAVE for over 5,000 years of human history, it will show how phony all this 'wealth' we think we have really IS. Gold and silver, being REAL money, tell you the truth about prices and values. Fiat is FAKE, it derives its 'value' in the same way as holy water gets its power...from the blessings of priests and the faith of their congregations.
That million dollar home looks pretty good in an economy with gold at 1200 an ounce. I can promise you it will look a whole lot different at say, 5000, 7000, or even something crazy...That would be gold saying, "Your currency is garbage...your gonna need a WHOLE lot more to buy me.." And you'll realize that this means it's gonna take a lot more to buy EVERYTHING, which means you're not nearly as 'wealthy' as you thought...
+1 Fucking brilliantly written. Underscores James Grant's "The FED can change what things look like....." statement.
CoT says otherwise: http://www.barchart.com/chart.php?sym=HGZ14&style=technical&template=&p=...
Which side is Goldman really on?
haha
you give a 1yr chart?
try the 5yr
Still looks like its poised for an upswing according to positioning.
You must be banking on residential and commercial housing growth? Automotive is trying to off their channel stuffing inventory to pay them 45 net to +120 net payment. Dealerships are offering up to 5 years with zero payments.
Guess we have entered the furniture market model. When will the electronic financing buy now pay later. Oops, your bill has been refinanced by other company who bought out the debt, and require to negotiate higher interest rates for paying off your 50" TV built in Globalization zones
http://geology.com/usgs/uses-of-copper/na
Call it, Crony Capitalism Pawn shop
I'm banking on the banksters always being on the "right" side of the trade. If you haven't noticed, fundamentals don't really play into things anymore.
It's a trap!
Fundamentals do not play into things anymore until they do.
Warehouse stocks are near historical lows. I'm not buyin' it.
http://www.kitcometals.com/charts/copper_historical_large.html#lmestocks...
Just north of where I live, the world's largest wholly underground copper nickle mine is under development. 500 high paying jobs are expected to begin with, work is underway in getting the mine open, production is some time off. Seeing that this is sulfide mining and wholly underground, much investment needs to be made in getting shafts open, and removal gear installed, water storgae and treatment. All this to tap a copper source and nickle source to rival Sudbury Ontario. The region has high hopes for this and other smaller mines. If this copper story is true, and a bubble is set to burst, I suspect some major tears around where I live!
" as has global growth expectations and global bond yields as a realization that 'demand' implied by previous prices was entirely artificial."
That is a knife in the heart of our new mines!
Will this mske ammo cheaper?
No copper mines without cartridges.
No lead mines without bullets.
No charcoal will sublime cold and without power.
Overloaded nuclear power plants are a danger, soon you will identify an American only turning off the lights at an airport, the guys are blue and shine!
Nowadays already does this with Nissan engines - the engine plant was within 48 kilometers of Fukushima, the Russians returned a lot of radioactive cars imported from Japan - open the hood of the car, check the engine, turn off the lights and see who is Japanese, they shine!
Kkkkkkkkkkkkkkkkkkkkk!
I for one am looking forward to the next few years. Based on everything I read, it seems we're heading into an environment where the prices of REAL things are going back to 2008 panic levels, due to a collapse in demand resulting from economic weakness, but this time without the corresponding crash in equities, which will be powering forward due to the rapidly expanding economy. I'm envisioning a kind of Utopia where FB and TWTR stock (our engines of growth and innovation) will be rising at 15 - 30%/year, with gas back down under .50/gallon.
And probably the icing on the cake - the thing that will make us all uber wealthy (in real terms, not that negative-nelly, Zimbabwe hyperinflation scenario the Cassandras of the world go on about) - due to the desperate need in the financial system for 'good collateral', there is a HUGE need for the US to run larger budget deficits, so this should allow a radical expansion of the welfare state, purely to meet that good collateral requirement, and I would think that at some point even single welfare moms in the 'hood will be able to start thinking about McMansion ownership as a real possibility, especially with .9% 30 year financing options.
Good times ahead folks, get ready to be super rich.
China wants/needs deflation in commodity prices concomitant with Washington/Wall Streets propaganda of wanting/needing lower commodity prices.
Curious to see how long this, "deflation" in commodity prices lasts. I'm thinking, "not very long".
If copper goes down, theft will too
This puts ADT and other home security system expansion target sales growth at risk.
/ lol
So what *isn't* on the edge of collapse these days?
They will find a way to fluff all this. Deflation is immediately unpopular with the masses, while inflation gives TPTB time to plan an exit.
"if we'd show a little humility, accept the verdict, and deflate the damned thing.
But TPTB won't allow the prices to fall, not without a fight"
The central banks atre printing like no other time in history. Trying to re-inflate. They'll get more than they wished for.
Surprinsingly, banks are long copper. They may want to buy even more, and then grill the hedge funds.
Junkie copper thieves hardest hit.
There will be less cases of electrocution now among those thieves.
Hmm. Maybe bullish for silver since many copper mines produce silver secondarily. If copper mining goes into decline so does silver production and it could be significant and there are virtually no silver stocks. It's dependent on flow.
Let me just interject that a crapload of silver is a by product of copper mining. I think about 85% of what is produced in the world. Positive for silver (real silver, not the paper fake stuff).
the premise is incorrect. to the extent that financiers in china held copper as collateral against loans, they would hedge with short copper futures. returning collateral, retrieving funds, and closing out the hedges would require them to buy back their copper futures... if anything leading to a rally.
copper may fall, but if it doews the reason will not be due to a group of loan sharks buying back their short futures.
According to the financial media, the global economy is supposedly rolling over causing a glut of inventories producing a deflation in the prices of many commodities. If this is the case… someone should tell that to King of base metals… Copper.
Something doesn’t seem to be making sense in the copper market as the price continues to decline, so are the level of global copper inventories. You would think the opposite would be the case, but we must remember in the new Financial Paradigm — Paper assets such as Derivatives, Stocks and Bonds are KING, while Gold-Silver and commodities are GARBAGE. Which is why (according to their mentality), financial assets are what we should EAT, while gold-silver and commodities are what we flush down the toilet once we are done digesting and consuming them (put another way–CRAP).
http://srsroccoreport.com/the-world-has-less-than-5-days-worth-of-copper...
A single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices.
On several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses, equal to about 140,000 tons, or enough to make the copper parts of the Statue of Liberty more than 1,700 times. As of Wednesday, the buyer owned between 50% and 80% of copper held in warehouses, according to the most recent exchange data.
At today’s prices, a 50% to 80% share of LME copper inventories would be worth anywhere from roughly $535 million to about $850 million.
http://online.wsj.com/articles/single-firm-holds-more-than-50-of-copper-...