Copper: Short-Term Moves, Long-Term Outlook

April 20, 2010

What's behind copper's latest moves—supply and demand, or the news cycle? Plus, are we headed for a supply bottleneck?
  • Have we returned to normal supply/demand?
  • How the Goldman fraud charges have affected copper
  • Why Rio Tinto forecasts a coming supply crunch

 

What A Difference A Year Makes

A little over a year ago, back when copper was at $4,135/tonne, we took a look at some of the forces working on copper. At that time I concluded, "Real recovery in copper will likely require sustained growth, and much lower stocks."

In retrospect, not so much.

My "much lower stocks" comment was oh-so-wrong. Today global inventories are roughly in line with where they were back then, but copper closed at $7,695/tonne yesterday—an increase of 86.1 percent. (Note to data hounds: Copper prices can be found both on the COMEX in $/lb and the London Metal Exchange in $/metric tonne. The LME provides easy-to-get inventory numbers and pricing information, so that's what I tend to use.)

 

Copper Global Inventories

 

As the chart above shows, 2008 displayed the classic inverse relationship of supply and price. When supply (as in LME stockpiles, represented with the blue line) was low, prices rose, and vice versa.

Prices nose-dived during the economic meltdown, and stockpiles rose because no one was buying, even at rock-bottom prices. But eventually in 2009, prices began to recover—pushed higher by China's restocking of copper inventories, which helped to decrease stockpiles. But prices then continued to rise, even as stockpiles were replenished.

It wasn't until the beginning of this year that the core supply/demand drivers began to (mostly) make sense again:

 

Worldwide Copper Inventories - 2010

 

But at the same time, it's too simple to expect stockpiles and copper prices to display a direct inverse relationship. Too many forces are at work here.

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