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THE COPPER JOURNAL
Prepared by
J.E. Gross & Associates, Inc.
On The Defensive
Rising production, Asian weakness, growing inventories, negative sentiment and nervous equity markets all collaborated to push copper lower.
Indeed, even the few scraps of good news found in falling Asian and European inventories a few weeks ago were washed away, as stocks on the Continent reversed course to reach a new high, while domestic warehouse stocks continue marching onward and upward. As of last week, domestic inventories held in COMEX and LME warehouses crossed the 200,000 ST mark, to reach the highest level since May 1985, when COMEX was a solo act in the United States.
Clearly, the current state of the fundamentals alone are enough to weigh on copper, and the other woes of the world are only making a bad situation worse. Relatively speaking, however, perhaps copper isn't really doing too badly. Look at gold. After peaking at $500 in December 1987, not long after Mr. Greenspan got into the drivers seat, gold slipped into a solid downtrend until early 1993 when it hit $320. Subsequently, it rallied up to $410 by July 1993; moved sideways within a range of $340 to $420 until last June when it finally fell through support, dropping to a twelve-year low of $307 last week.
Interestingly, although talk of Swiss selling helped push gold over the edge, it is nevertheless worth noting that gold held in COMEX warehouses stands at just 640,000 troy ounces, down from 1 million ounces last April and is off some 1.1 million ounces from the recent high of 1.7 million ounces in June 1996. Similarly, although silver managed to rally from a low of $4.20 in July, to $5.30 in early October, it too fell victim to the bears, as the price fell back to $4.20 last week, despite the steady withdrawal of silver from COMEX stocks. Today, silver held in exchange warehouses stands at 133 million troy ounces, down from 205 million when the year began. At what point will negative sentiment give way to the fundamentals?
Getting back to copper, although the rapid rise in inventories since June (+261,000 ST) is in large part a result of turmoil in the Asian market, through July the global numbers were still not too bad. In their latest summary, the International Copper Study Group reported a global surplus ofjust 55,000 MT for the first seven months of 1997, as compared to a 3 1,000 MT deficit during the comparable 1996 period. On the supply side, output rose 460,000 MT or 6.3% to 7.75 million metric tons, while consumption increased 373,000 MT, representing a 5.1% increase over last year, bringing demand up to 7.70 million MT.
Notable among the changes in production, Chile accounted for 44% of the global increase with a gain of 204,000 MT, pushing output to 1. 16 million MT. China represented 12% of the rise as their production of refined climbed 56,000 MT to 713,000 MT; Mexico represents 8% of the increase as production there soared 33% to 155,000 MT, while the United States contributed just 18,000 MT or 4% to the global gain as domestic output rose 1.3 % to 1.39 million MT.
On the demand side of the equation, the United States stands out with a 5% gain, bringing consumption to nearly 1.6 million MT through July; Canada rose 8% to 140,000 MT; China was up 10% to 762,400 MT; South Korea rose 10% to 378,000 MT and Taiwan was still going great guns with a 17% increase, bringing their consumption up to 353,500 MT.
Within the domestic market specifically, although cathode is readily available, rod continues to be tight. In the Northeast, rod mills are completely sold out and very little uncommitted capacity exists elsewhere. Without question, strong demand in and of itself is the primary reason for tightness, but the fear of not being able to get enough metal leads to some double buying while problems at Union Pacific persist, causing metal to be caught up in transit and putting enormous pressure on the trucking industry.
Where Do We Stand Now?
–December copper fell through the .93¢ support level, setting off a chain reaction of stop-loss orders, as well as initiating fresh short positions and taking us down to a new low of 87.500. Given the series of lower highs and lower lows since June and stretching back to July of 1995, on a longer-term basis, copper is looking increasingly precarious. Not only is the market failing within a fairly tight channel, but notice also that any rally is short lived and lacks the fortitude to even get past lines of resistance.
Despite the obvious direction of the market, however, we should not rule out the potential of a technical correction. While this may sound absurd at this time given the abundance of bearish news, $1.05 is still on our radar screen as an upside target. Why? From the $1.24 high in June, copper lost about 360 to last week's low of 87.500. A 50% correction (.18¢) from the low targets $1.05. Not to say this will happen, but rather to suggest that the potential does exist. Bearish sentiment is fairly high, and this often brings out the contrarians in the market. But even if the market gets back above a buck, it does not necessarily mean a change in the overall trend, just a correction along the way.
–Spot copper averaged 93.08¢ on COMEX during October, off 2¢ from September and down 45 points from last October. The year-to-date average now stands at $1.0761, up less than a cent from $1.0669 during the first ten months of 1996.
–Despite the potential of a correction, as the price fell, open interest rose sharply on COMEX during October, suggesting that further weakness lies ahead.
–Although another 15,450 ST of excess metal found its way into exchange warehouses, bringing us up to a 41 month high of 443,808 ST, spreads have been narrowing. On COMEX, Nov.-Dec. came into just 5 points at month end after trading at 60 points in early October; Dec.-Dec. 1998 finished either side of flat, while the cash to three-month spread in London came into $7 from $24 on October 1st.
November 3, 1997J.E. Gross & Associates, Inc.
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Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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