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THE COPPER JOURNAL
Prepared by
J.E. Gross & Associates, Inc.
The Only Constant...Is Change
Earlier this year, we focused on `synchronized global economic growth' to describe the rising trend of world prosperity. Today, however, a very different picture emerges.
The currency crisis in Southeast Asia; the demise of Japan's fourth largest securities company, representing the largest corporate failure there since World War II, and South Korea's plea to the International Monetary Fund for massive assistance have all contributed to a sense of confidence, evolving into an uneasy feeling of concern. Although analysts may debate the depth of severity in each particular country and differ on how the United States will be affected, the one common theme that comes through, is the short-term pain will ultimately be beneficial toward creating a stronger foundation for future growth. What does this mean for copper?
Without question, consumption has already been affected as demonstrated by the rapid rise in inventories held in exchange warehouses. From the recent low of 182,950 ST in June, total inventories rose 271,180 ST, or almost 150% over the past five months, to a new high of 454,123 ST. Interestingly, although the United States represents the region of strongest demand today, oddly enough, we are also holding the largest share of inventory, with a good part of it stored in LME warehouses in California, which as we saw just a few years ago, puts this metal, economically speaking, out of reach to the domestic market. Between Los Angeles and Long Beach alone, 137,450 ST is held on warrant, representing 37% of total LME stocks, and is fully 62% of total domestic exchange warehouse stocks. Thus, one can make a case for viewing inventories on the west coast as being something of a barometer to measure Asian demand.
Looking at South Korea specifically, over the past five years, consumption of copper increased 83% to an estimated 650,000 MT this year, reflecting an average annual growth rate in the neighborhood of 13%, well above the 6.5% annual average for Asia as a whole during this same period. Further, South Korea has grown to be the eleventh largest economy in the world and also represents 5% of global consumption.
Given the austerity measures and reform programs that the IMF is expected to impose, some analysts are predicting that South Korea's economy may contract next year, which would be the first pull back in 18 years. Looking at the global market, however, there are other factors that could help to mitigate pockets of weakness.
Although China thus far hasn't shown itself to be the `big buyer' that many expected or hoped for earlier this year–despite the sharp drop in prices, demand there has nevertheless risen a sturdy 4% through August, as compared to the first eight months of 1996. Demand in Taiwan is also running considerably ahead of the year ago period, with an 11% increase and despite the negative news on Japan, consumption is reported to be up 2% from 1996.
In Europe, demand is somewhat mixed. Among the major economies, consumption of refined is off 2.5% in Germany; Italy is down 2%, while Poland is virtually flat. France however, is running 5% ahead of 1996; Belgium is up 4.5% and Scandinavia posted a 6% increase in demand. As for North America, Canadian consumption is up 2.5%; Mexico +2.2%, with the United States posting a 5.3% increase, which will bring demand this year up to another record high.
Putting it all together, through August, global demand is up 5% from 1996, but by the time final numbers are rationalized and revised, the 1997 change will be a smaller, but still positive number. Of course, supply is also rising, with a 7% increase posted through August, thereby outpacing demand and bringing us once again, to the ebbing tide of the copper cycle.
Where Do We Stand Now?
–The selling continues. Contrary to expectations that a technical correction was forthcoming, traders pushed the market down to new lows, to include a `gap down' opening on November 18, as sell stops were triggered, and another support level gave way to the bears. Finishing the month at 84.05¢, spot copper gave up another 6.65¢, falling to its lowest level since January 1994. Technically, the market was oversold two weeks ago and the new selling has pushed the relative strength index even deeper into oversold territory, suggesting that a correction is now long overdue. However, (here comes the but...) as we all know there is an axiom to justify nearly every market situation and this one is no exception. That is to say, `there is no market so oversold, that it can't be even more oversold.' Little consolation, but it rings true. Nevertheless, in the short term, support is arbitrarily pegged at the recent 83¢ low basis December and beyond that, we have to go back to the late 1993 period on the spot chart, where there was a good deal of consolidation between 78¢ and 82¢. On the upside, 87¢, representing the lower end of the gap is the first line of resistance, followed by `old support/new resistance' at 88¢ as well as 93¢ and $1.00. At this point, there is little on the horizon to suggest the overall downtrend is going to reverse any time soon, but technical trading and the emergence of the contrarian crowd could keep things volatile.
–Spot copper averaged 87.550 on COMEX during November, down 5.53 cents from October and 13.23 cents from last November. The 1997 year-to- date average now stands at $1.0579, off just 36 points from $1.0615 during the first eleven months of 1996.
–The contango widened substantially during November. Spot-to-one-month forward moved to 75 points from a 25-point back when the month began; Spot-to-three months went out to 2.0 cents from 10 points, while December/December 1998 traded out to 3.0 cents after being flat when the month began.
–Copper for average 1998 is now trading at about 87.00 cents, down from 89.50 cents two weeks ago.
December 1, 1997 J.E. Gross & Associates, Inc.
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