"Dr.Copper"'s Contango Crushes Economic Hype

Tyler Durden's picture

We warned two weeks ago that China's "Bronze Swan" was looming as the crackdown on leverage in the system by Chinese authorities may be forcing unwinds of the CCFDs - thus putting upward pressure on Copper futures (unwinding short positions) and selling physical copper (which would mean procuring the physical metal before passing it on). Those effects were exactly what we had been seeing in the market until the end of August.

And now, it appears, as StockBoardAsset.com notes, exhaustion has started to set in across industry metals...

Barclays has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal,with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

And finally, bear in mind that the lagged response to China's credit impulse is about to hit base metals... The rise and fall in China's credit impulse that has been so highly correlated (on a lagged basis) with copper for the last eight years...

 

And now, as Frik Els of Mining.com explains, Copper futures trading on the Comex market in New York suffered another sharp decline on Wednesday as analysts warn of a likely correction following weeks of speculative buying.

In massive volumes of 2.7 billion pounds in morning trade alone copper for delivery in December slumped to a low of 2.9710 a pound ($6,550 per tonne), down more than 2% from Tuesday’s close to a three-week low.

A week ago copper hit an intra-day high just shy of $3.18 a pound (more than $7,000 a tonne), the highest since September 2014. But disappointment about imports by China,  responsible for some 46% of global consumption of the metal, and receding supply worries saw the rally come to a screeching halt.

The prospect of a weakening renminbi also emerged as factor for the pullback after Chinese policymakers this week relaxed rules to curb speculation against the yuan which had been in place for nearly two years.

A correction on copper markets may also have been overdue as speculative interest have been running ahead of industry fundamentals. Hedge funds built successive record net long positions – bets on rising prices – in recent weeks which according to the latest report totalled the equivalent of more than $9 billion at today’s prices.

Reports at the end of July that China is planning to ban the importation of scrap copper by the end of next year, sparked the rally from copper’s summer lows, but caught many in the industry by surprise.

Investment banks and institutions are now catching up and according to the September survey by FocusEconomics released yesterday eight of the 24 analysts polled upgraded their fourth quarter forecasts compared to projections made the month before.

While no-one downgraded the outlook for copper, consensus forecasts remain well below ruling prices however.

Analysts project that prices will average $5,870 per tonne in Q4 2017 and $5,844 per tonne in Q4 2018. The lowest forecast for Q4 2017 is $4,899 per tonne, while the maximum forecast is $6,674 per tonne. Among the pessimists. Barclays, Deutsche Bank, JP Morgan and Macquarie all saw a prices average more than 15% below today’s price going into 2018.

The price forecasts for Q4 2017 were raised for nine metals and minerals, including aluminium, lead and iron ore. Tin was the only exception with economics lowering their price expectations for the rest of the year.

*  *  *

And finally, as Bloomberg details, here’s some more grist for the doubters who scoffed at copper’s rally to a three-year high earlier this month.

The metal for immediate delivery on the London Metal Exchange cost $40.75 less than benchmark three-month futures on Tuesday, the biggest discount since 2009.

That market structure, known ascontango, shows “there’s no part of the world where copper is really scarce,” said Rene van der Kam, Singapore-based managing director of trader Viant Commodities Pte Ltd. He says to expect more losses after a pullback in prices this week.

It appears "Dr.Copper" is about to be relegated to "ignore" status once again.

And why your average joe American should care... the Copper/Gold Ratio is misfiring and more likely to revert back to UST10Y levels. The correlation broke in late August.

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GUS100CORRINA's picture

"Dr.Copper"'s Contango Crushes Economic Hype

My response: This market is LONG in the TOOTH.

Ghost of PartysOver's picture

I stay away from trading any instrument that can be strongly influenced by some pluck-it-out-the-arse report from China.  About the only thing China excels over Murica is the ability for "creative" economic reports.  And Murica is pretty good at that so kudos to China.

knukles's picture

Excuse me?  Scarce?
I cannot for the life of me find those pennies that fell out of my pocket and down between the seat and the driveshaft tunnel.  Found some pretty nefarious garf, but no missing pennies.
They was shiny, too!

Skippy says stick your fingers up your nostrils

TahoeBilly2012's picture

Wait I though the dollar was long in the tooth, can you guys get this straight.

ali-ali-al-qomfri's picture

FANG SHUI,

it's the latest craze to director your portfolio for maximum asset growth,expansion and flow.

but you gotta put that red chair in the corner facing northwest,

and the carpet has to go.

 

(intended for A. Boaty)

Apply Force's picture

C'mon Knucks - they demonitized our pennies a while back, but it does help them shine a bit more!

BTW copper is not really scarce anywhere only because the wheels are falling off, which slows building & production quite a bit. 

A. Boaty's picture

Maybe you should invest in FANG.

Peacefulwarrior's picture

Another bullish asset purchasing Central Bank growth story

NoWayJose's picture

Let me guess - the algos sold out of copper and are jumping onto WTI?

buzzsaw99's picture

i'm sure there's a perfectly good (and not artarded at all) reason for the correlation in that last chart.

any_mouse's picture

I'd like to know what the logic of a correlation is between a ratio between prices of two different metals and UST 10yr yield.

Just because there happened to have been a correlation in the past is no indicator of future correlation.

This and Bitcoin having to fill in a price gap at $3,000USD. Why? Do buyers and sellers have some unconscious mechanism that seeks to buy and sell in a price gap?

Resistance and Support I can grasp. No magic, no animal spirits.

Soul Glow's picture

In 2009 I told a friend precious metals were a good investment.  I specifically said to buy silver.  He went out and bought a garbage can of copper pennies.  You can't help everyone I guess.

syzygysus's picture

Maybe he wanted to scrooge mcduck in a kiddie pool...ya never know.

shizzledizzle's picture

Still could be a sound investment... Just don't get caught melting them down.

Iskiab's picture

True, pennies cost more to make then their value. Some clever arbitrage there.

Emergency Ward's picture

As fiber and wireless replace copper, Verizon, Frontier, and AT&T find they own a huge copper mine of in-the-ground idle copper cable.

Osmium's picture

Don't forget PEX tubing for plumbing.  That has to be cutting into copper sales.

Nobody For President's picture

How much copper in a smart phone?

virgilcaine's picture

Gold would have been a better purchase. Most precious physical in hand.  Rare Coins or Bullion

GodHelpAmerica's picture

It's the dollar stupid!

ali-ali-al-qomfri's picture

I'll tell ya where Copper isn't.

In pennies.

What does that tell you?????????

 

I remember reading (on ZH, thank you) stories of copper wharehouses in China used in letters of credit, etc. in a fractional reserve retarded way.

docloxvio's picture

I rember reading that too. I think that was how I learned about re-hypothocation .

MrSteve's picture

Coinflation.com shows copper US cents are 100 =$1.95 and the zinc slug cents are 100=$0.77. HOWEVER, it is illegal to melt US coins.

any_mouse's picture

Hypothecated. Like Gold in City of London vaults.

As long as no one asks for delivery, it is all good.

The Chinese learned well from their masters in The City.

OCnStiggs's picture

With all the car manufacturers announcing they will stop production of gas engined vehicles in a few years, those car motors will have to be made of copper windings with heavy wiring from the batteries to the motor. Its estimated the weight of copper per vehicle will double or triple.

 

Iskiab's picture

If that ever happened they'd substitute to a different material. Copper is an okay conductor, it's mainly used because it's cheap.

Quinvarius's picture

Contango is the normal state of the markets.  Backwardation is what indicates excessive speculation and an impending crash.  This guy is an idiot.  And I know there are various fools who swear up and down backwardation is bullish.  Those people are called GD morons.  I have never in my life seen backwardation ever do anything but collapse and crush spot.  Harvey Organ, I am talking to your stupid ass.

fulliautomatix's picture

Vintage ZH article. Good to see.

In.Sip.ient's picture

Right.

Build enough electric cars, and we'll see

how long that copper supply lasts...