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Current Copper Price Below Cost of Production

EconMatters's picture




 

By EconMatters 

 

Long Dollar Trade

 

One of the common trades in financial markets these days is going long the US Dollar and shorting Commodities, especially the precious and industrial metals. This has been a bad year for commodities, and this trade has picked up steam with large fund flows the last 6 weeks.

 

Schizophrenic Fed & Employment Reports

This all turned around after the poor employment report of October 2nd, followed by some trade unwinding thinking the Federal Reserve may be on hold for the remainder of the year after the dismal October Employment Report. This resulted in about eight days of currency unwinds and around October 14th, Investors started putting the Long Dollar Trade back on as they realized the Fed still wanted to raise rates, and since China seemed to stabilize from a crashing standpoint, Fed Speak became hawkish to telegraph to financial markets that the December meeting was a potential live meeting for a rate rise. This trade really picked up speed when the November 6th Employment Report came in much stronger than anticipated with a robust 271,000 new jobs created for the previous month.

 

Trading Algos & Paper Markets

 

Oil has also been hit along with the metals but it has inventory issues to contend with and is in the midst of a price war for market share. But there is no such price war in the metals industry, and although China`s weakness has no doubt tempered demand, the precious and industrial metals are basically being hammered down in the paper markets by fund flows in this Long Dollar Trade. This trade has become such a reflexive trade, that if the US Dollar is strong, the trading algos just start attacking Gold, Silver, Copper, Aluminum, Platinum and Palladium. These metals by and large trade as a group with slight differences in the charts based upon any unique demand characteristics of the given metal.

 

Soft Demand

 

Demand hasn`t really fluctuated much for any of these metals the last six weeks, China and the global economy are just sort of trudging along with China`s rebalancing and the global economy growing somewhere in the area of 3.5%. But what has changed the last 6 weeks is the large fund flows into the US Dollar all trying to front run the Federal Reserve, and shorting the Euro, (which makes up the largest component in the US Dollar Index), with traders also front running Mario Draghi who has been telegraphing more future stimulus for the European Union.

 

No Shale Technology for Copper Mining

 

But at some point every asset has a price, it really comes down to price, markets often over shoot in one direction or the other, but ultimately, what is a ‘fair price’ given the dynamics in the market. Copper is an interesting market because it is being slammed down with Gold and Oil, and the supply side of the Copper market has had its issues in 2015, with supply constraints limiting new supply on the market. Most of the pressures have come from the demand side of the equation with China`s rebalancing. But Copper doesn`t grow on trees, and is actually rather difficult to get out of the ground and process from a cost perspective. The steps involved in actually processing Copper to get it in a marketable form are rather extensive and involve considerable resources. And with six straight weeks of slamming down by traders we have reached the low level of $2 on the Nymex December Futures contract.

 

Marginal versus Production Processing Costs

 

There are various estimates for what the Marginal Cost of getting Copper out of the ground is before supply is taken offline completely. But it is reasonable to assume that Copper is currently being priced well below the long term Production Cost of Processing the Industrial Metal, and a large component for this trend is strictly fund flows in the Long Dollar Trade.

 

Path Forward for Copper

 

I am not sure how much this trade has left in it for the near term, who literally knows with asset prices and financial markets these days. But my intuition is that this Long Dollar Trade will probably be pushed into the European Central Bank Decision regarding more stimulus measures and the Fed December Meetings regarding a 25 basis point hike. Also, two other contributing factors are the December 4th Employment Report and traders wanting to take profits before the actual event in early December.

 

Buy the Rumor, Sell the News

 

And given the fact that the Federal Reserve is probably going to go out of its way to talk dovish with a 25 basis point rate hike, almost a “One and Done” intended messaging given what the rest of the world is doing in this robust currency devaluation game; it probably means that traders buy the rumor, and sell the US Dollar hard after the actual news of a rate hike, at least in the near term.

 

Short Covering Rally

 

This is when traders will probably really unwind these Fund Flows with buying Gold hand over fist, covering the substantial shorts in the market, and simultaneously putting new money to work in Gold and the rest of the Industrial and Precious Metals. And if it starts getting cold Oil might even get a bid along with these commodities. We shall see how this all plays out in the market, but $2 Copper could be setting up for an ample short covering rally before 2015 ends!

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Mon, 11/23/2015 - 10:43 | 6827201 sam site
sam site's picture

 

The "Current Copper Price Below Cost of Production" only reflects the temporary surplus inventory build up. 

When that's used up at any price we'll see how much "growth" products are in demand like copper used in new construction.

 

I suspect the world has a lot of shrinking to do since the population bubble is about to be deflated along with the money and all the other bubbles our great central bankers have bestowed on us.

 

 

Mon, 11/23/2015 - 09:40 | 6827032 Chuckster
Chuckster's picture

BS is under the cost of production.

Mon, 11/23/2015 - 09:22 | 6826975 overmedicatedun...
overmedicatedundersexed's picture

look at FCX in the 8 buck range..a great co, now the walking dead and a good bk bet. oil and copper co and now at historic lows..i do not know should I go long FCX or short it..crazy

Mon, 11/23/2015 - 08:10 | 6826831 Watson
Watson's picture

>>>
Current Copper Price Below Cost of Production
<<<

If the world economy slows, the demand for Cu will fall.
And thus the price.

And production cost is not a floor - there are substantial stockpiles.
Watson

Sun, 11/22/2015 - 21:43 | 6826096 Dragon HAwk
Dragon HAwk's picture

Short Squeeze... is that sort of like when they need the silver for making cruise missiles and we need the Silver for sound money ?

Sun, 11/22/2015 - 19:42 | 6825747 kuro_neko
kuro_neko's picture

<---- the same thing will happen to gold very soon as it heads for 700$

<---- you're living in denial

Sun, 11/22/2015 - 21:07 | 6825991 SILVERGEDDON
SILVERGEDDON's picture

THAT - is a LOT of black diamond run ski hill graphs, all ending up in the red.

Isn't that a trend of some sort ?

Bodes well for a shortage of physical silver, the most common by product of silver mining.

Sun, 11/22/2015 - 17:24 | 6825344 Quinvarius
Quinvarius's picture

They mine 20 milion tons of copper a year.  That is up from 17 million just a few years ago.  There is no place to put it all.  It is not being consumed at anywhere near the rate it is being produced.  The economy is imploding.  The price is going down.  Even if someone wanted to prop the price up, they could not store all of it.

Sun, 11/22/2015 - 19:19 | 6825678 HenryHall
HenryHall's picture

There's a simple solution to the storage problem - make coin money out of pure copper.

A parallel worldwide currency with a floating exchange rate.

Let any nation that wants to coin the money do so and sell for whatever the market will bear. It has to have the weight of pure copper shown on the face of the coin. One, two, five and ten ounce coins of standardized dimensions.

Sun, 11/22/2015 - 14:54 | 6824922 arbwhore
arbwhore's picture

CRB approaching 40 year lows Currently 184, 40 year low set in 1975 at 175 and change. Will it hold and bounce like it has done for the last 40 years?

Sun, 11/22/2015 - 13:23 | 6824599 Rhal
Rhal's picture

Watch the silver price. 

Most silver currently mined is a byproduct from mining copper, nickle, lead and zink. When silver seeks true value, these base metals will be in surplus, a byproduct of precious metals mining.

On the other hand derivatives commidities may trade in the hundreds over the principal asset. It's going to be interesting as the derivatives collapse how derivatives holder try to get payment for commodities they thought they owned, but don't.

Money talks: I've wondered if confiscation laws will happen to try and take from physical holders and give to derivatives holders.

Sun, 11/22/2015 - 11:50 | 6824365 Kayman
Kayman's picture

When industrial/wholesale prices collapse there is always a tough ride down before it gets to the retail customer.

But I wonder, with the ghost cities/malls and closed up Chinese industrial plants, when does China start scrapping out copper themselves. Copper could find itself under $1/ pound if all the wasted investment in China starts to get liquidated.

Sun, 11/22/2015 - 21:17 | 6826009 worbsid
worbsid's picture

check:  http://www.providentmetals.com/bullion/copper/1-avdp-pound.html  Shipping must be a couple bucks, plus raw, plus stamping logo, etc.

Mon, 11/23/2015 - 09:11 | 6826947 HenryHall
HenryHall's picture

Mark up at that place is north of 200%. Not a reasonable 20%.

Heck that stuff is more expensive per pound than retail copper pipe from Home Depot. And copper pipe has real utility in addition to value as money.

Sun, 11/22/2015 - 12:32 | 6824477 HenryHall
HenryHall's picture

The first British copper pennies (1797) contained one ounce of copper, worth about 13 US cents today.

There is definitely a market for someone to make one ounce copper disks and sell them at, say, spot plus 20% in quantity 100. About USD16 or GBP10.

Face value "One ounce of pure copper".

Sun, 11/22/2015 - 11:32 | 6824298 HenryHall
HenryHall's picture

Paper copper $2.06/lb at investing.com

http://www.investing.com/commodities/copper

Copper metal $5.03+tax  at home depot

http://www.homedepot.com/p/Unbranded-1-2-in-x-10-ft-Copper-Type-L-Pipe-L...

 

So where can I obtain copper metal for anything remotely close to $2/lb?

Sun, 11/22/2015 - 12:41 | 6824505 Cheduba
Cheduba's picture

You can buy copper cathode for that price straight from the mines.  Anything after that, you are paying for the extra energy inputs to remelt and reform the products, labor, and transportation costs.

Sun, 11/22/2015 - 10:33 | 6824184 TurnwiseWiddershins
TurnwiseWiddershins's picture

This electrician has a lot of poundage of copper accumulating, but isn't going to sell it until they rebound over $5/lb. Got some plumber's droppings too.

KEEP STACKING BIDGES!!!

Sun, 11/22/2015 - 14:38 | 6824870 CoonT
CoonT's picture

This tin banger follows you electrician's around, and picks up the bits you leave behind. I'm sure as hell not selling at this BS $2.00/lb, either. If it ever goes back to $4 or even $5, then I'll sell the pile and buy a crate of 7.62 

Sun, 11/22/2015 - 08:30 | 6823921 Kina
Kina's picture

IS that because there is a glut of paper copper in Shanghai warehouses?

Sun, 11/22/2015 - 14:55 | 6824930 arbwhore
arbwhore's picture

At the rate they are exploding there won't be much left by Christmas.

Sun, 11/22/2015 - 10:34 | 6824186 TurnwiseWiddershins
TurnwiseWiddershins's picture

Is there?  Could be, could be.  The financeers are not above anything.

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