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.