A Tarnish On Long-Term Copper

January 26, 2009

Copper's been taking a beating lately, and good news is hard to find.
  • LME inventory woes
  • Faltering demand
  • Prospects for an Obama bump


Supply and demand statistics for copper were release January 20 by the International Copper Study Group - of course, like many statistical reports, there is some lag time and data is a bit delayed. This latest release contains information through October 30, 2008. These "latest" statistics put some definite numbers to what everyone has already known – demand for copper in key markets has dropped. Usage in the U.S. dropped by 10.3%, while the EU-15 countries and Japan had much more modest declines – 2.8% and 1.9%, respectively. But even so, use of refined copper managed to grow by 2.8% over the same time period in 2007.


Why Is Everyone Concentrating on the Bad News?

The big surprise (sarcasm) is that China had an increase of 12.7%. But that's only apparent copper usage. And in China, appearances can be deceiving.

Reuters independently calculated that Chinese demand for copper rose only 7% for all of 2008, compared with a 36% rise in 2007. And while China's still expected to grow, it's expected to be anemic:


"We expect Chinese copper demand to remain positive, but much lower than last year, rising 3.5 percent in 2009," Barclays Capital analyst Yingxi Yu said.


"Globally, we also expect to see positive demand growth, but there are risks it might be less than our expectations of a 1.1 percent rise."


Given that China has been the big growth engine of the global commodities market, these single-digit numbers are definitely not good news, because it means copper bulls have to count on the rest of the world, and that hasn't been working out so well either. U.S. housing starts – a good demand indicator for copper due to the miles of copper pipes and wiring used in the construction industry – are at 50-year lows.

The only good news for copper prices is that is looks like the incidence of pillaging buildings for scrap copper has gone down. Apparently it had gotten so prevalent in Florida that since October, scrap companies were photographing sellers and logging their vehicles as they dropped off materials to "recycle," in an effort to curb illegal scrap harvesting (aka stealing).

Across the ocean at the London Metals Exchange, copper inventory levels are moving up, while prices are down. In fact, prices are back to levels not seen since the first quarter of 2005.


Copper Price & Inventory Levels


Looking at the graph above, you can see how price and inventory levels have interacted. Inventory is not a direct measure of demand, but it does give a hint as to what's going on in the larger market. The LME has not reported inventory levels this high since 2003/2004, and it's a pretty good guess that if inventory continues to climb, we will start seeing the same kind of prices we had back in 2002.

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