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THE COPPER JOURNAL
Prepared by
J.E. Gross & Associates, Inc.
Right...But For The Wrong Reasons
For several years now, one of the main topics, if not concerns, has been the anticipated increase in global production, that inevitably would out pace demand and send prices tumbling. Today, the price of copper is hovering at a fifteen-month low of 880, but not because of all the new production, rather, because of sudden and severe weakness in the Asian market.
Take a look at the numbers. Over the past five years, global production rose some 2.3 million mt or 21% since 1992, a huge number for sure, but don't ignore the 2.2 million tonne increase in demand over the same period. Who would have guessed in 1991 or 1992 that we would experience these rates of demand a few years down the road? More specifically, look at the Asian region as a growing percentage of world consumption. Although global demand rose 19% from 1992 to 1997, the Asian market soared 37%, taking their share of the world to 39% today. These trends are not aberrations, or entirely the result of overheated economies that are now being corrected, but rather, embedded in the numbers, is the awakening of an enormous constituency of the world economy.
Consumption: 1992 1993 1994 China 910 985 800 Hong Kong 10 15 5 India 100 105 135 Indonesia 50 55 60 Japan 1410 1385 1375 Malaysia 80 90 110 Philippines 30 30 30 South Korea 355 400 475 Taiwan 430 490 560 Thailand 90 120 170 Other 305 275 295 Total Asia 3770 3950 4015 World Total 11010 11035 11545 Asia As% Of World 34% 36% 35% Annual Asian Change +6.5% +4.8% +1.6% Annual World Change +2.3% +0.2% +4.6% Global Production: 11040 11250 11100 Surplus/Deficit +30 +215 (445) Consumption: 1995 1996 1997 China 1115 1225 1305 Hong Kong 20 35 55 India 120 140 145 Indonesia 85 95 105 Japan 1415 1480 1480 Malaysia 110 145 155 Philippines 45 35 45 South Korea 555 595 650 Taiwan 575 545 600 Thailand 150 155 150 Other 345 420 460 Total Asia 4535 4870 5150 World Total 12095 12560 13200 Asia As % Of World 37% 39% 39% Annual Asian Change +13.0% +7.4% +5.7% Annual World Change +4.8% +3.8% +5.1% Global Production: 11880 12635 13350 Surplus/Deficit (215) +75 +150 Thousands Of Metric Tonnes
No question, the problems in Southeast Asia are real, but they will be fixed. It wasn't that long ago that Mexico had its financial difficulty, but their economy is growing once again.
Likewise, the United States wasn't immune to over building or speculative excess either, as many multimillion dollar commercial properties stood vacant in the 1980's and our banking system was threatened by widespread failures of major institutions. These problems come with the territory of economic growth and result from optimism that leads to over confidence, which in turn has to be corrected by contraction, in order for the cycle of growth to continue.
More importantly, on a longer-term basis, the Asian region is home to some 3.4 billion people, representing 59% of the global population, well above their 39% share of global consumption. This is not to suggest that the problems in Asia are going to be fixed overnight, or that consumption of copper will get right back on track, but the long- term trends are clear. While production and consumption will get out of sync from time to time, the world will nevertheless need more copper.
Where Do We Stand Now?
–Copper remains under pressure. After breaking support at 930 last month, December copper has been vacillating within a new, albeit lower range of about 87.500-92.500, thereby exhibiting initial levels of support and resistance. Without question, the downtrend since June is intact and for all intents and purposes, one has to assume it ain't going to change anytime soon. Thus, if the recent lows are taken out, there is a strong possibility we will test the 1996 lows in the neighborhood of 860. After that, we begin looking at the 1993 lows when copper fell into the 700 range. Before that happens though, we are still inclined to expect a technical correction that should take us higher. But it won't be easy. Old support/new resistance at 930 will be difficult to overcome and there is considerable consolidation between $.93 and $1.00 that will also slow any advance. If in the event we somehow manage to approach a buck again basis December, even more resistance can be expected. Unless something out of the ordinary occurs, run ups, technical or otherwise will be viewed as selling opportunities.
–Combined warehouse stocks rose nearly 6,700 ST since the month began to a new high of 450,479 ST. Increases in the United States and Europe, were offset by a 4,465 ST drawdown of Asian inventories.
–Open interest on COMEX has risen to nearly 65,800 contracts, the highest level since May 1994. The increase in open interest, coupled with lower prices suggests further weakness.
–Copper for average 1998 is trading at about 89.500 on COMEX.
November 15, 1997 J.E. Gross & Associates, Inc.
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Consensus National Futures and Financial On Line Index
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