London Calling hunts for the truth about copperPublished by MAC on 2009-07-07
Source: Nostromo Research (2009-07-02)
Last year, MAC ran an article by Simon Hunt, of the eponymous London-based consultancy, which trounced the idea that the rise in copper prices during the previous few years was stimulated by real demand for the red metal. Hunt's voice was a lone one, and it ran absolutely counter to received "wisdom" from the mining industry. See: http://www.minesandcommunities.org//article.php?a=8951
The collapse in copper prices during late 2008 and until spring this year, appeared to confirm Mr Hunt's views, but the relative price surge over the last four months has thrown doubt upon his contention.
Now, in another important "take" on the global copper market, Simon Hunt is even more adamant that his previous analysis was sound.
Last month, at Metal Bulletin's International Copper Conference, held in Bilbao, Spain, Hunt commented on "the consequences [that] extreme levels of debt, deleveraging, high levels of interest rates in the U.S. and elsewhere, falling inflation, high real mortgage rates, the collapse in household debt growth to levels not seen since the great depression, matched by soaring government debt, collapsing velocity of money and a rapidly falling trade deficit - and the effects of this combination of factors" are likely to have on metals marketing over the coming years.
Going further, Mr Hunt asserted that: "We are in the early stages of debt deflation which will impact metal prices of all descriptions." Moreover: "[W]e are in the winter cycle of [a long-term wave] which should last until around 2017."
This means that any "recoveries" will tend to last months rather than years; thus "recent market rallies should be viewed with suspicion in the long term scheme of things."
Hunt claims that the end of the "up" cycle in copper has made end users (consumers) "understand fully what drove prices up in the last four years", as a result of which they are "designing copper out of their systems as much as they can, or minimising its use via tighter specifications."
Hedge funds at play
With regard to China, Mr Hunt believes that around 170kt of copper, purchased by the country's State Reserve Bureau, actually entered the country in the first four months of this year - not 70kt as reported. "Thus the surplus, mostly held outside the reporting system, was around 500kt at the end of April. "
This in itself (if you follow conventional economic supply-demand theory) predisposes the market to depression. By now, it's likely that this surplus will have reached around 800kt.
Who is holding all this excess? "Hedge funds, merchants, Chinese financial institutions, individuals, fabricators and private sector companies having nothing to do with the industry", declares Hunt.
"These purchases are a bet on rising prices." (However, given what we know about the "shorting" strategies of many hedge funds, they could also comprise bets against such a rise.)
In any case, according to Simon Hunt: "Most, if not all, of this material is held outside the reporting system." He expects lower prices will soon be seen in an "increasingly volatile marketplace for the metal"; and, with the global economy facing a renewed downturn, prices may dive from 2011 onwards - indeed, may actually collapse by then.
Not good news at all for the world's leading copper mining companies - Codelco Freeport (which together produced around 20% of global output in 2008) followed by BHP Billiton, Xstrata, Rio Tinto and Anglo American (with just over the same amount dug up between them).
Sources: "Copper price prospects in a recessionary decade" by Lawrence Williams,
Mineweb, 19 June 2009; data on global copper production, 2008, See: http://www.kghm.pl/index.dhtml?categoryid=258〈=en
[London Calling is published by Nostromo Research. Opinions expressed in this column do not necessarily represent those of any other person, including the editors of the MAC website. Reproduction is welcomed, provided acknowledgment is given to Nostromo Research and any sources quoted.]