wmeubank@ocp.kcmo.com
THE COPPER JOURNAL
Prepared by
J.E. Gross & Associates, Inc.
Leveling Off?
After months of steady increases in warehouse stocks, inventories finally fell. It wasn't a tremendous number, just a few thousand tons, but more importantly, it raises the question regarding whether we are on the verge of something of greater significance. Clearly, it is too early to tell, as three days of withdrawals does not a trend make, but it does warrant our attention.
The change becomes all the more interesting, because over the last few days, Asian stocks fell some 3,800 ST and European inventories were off almost 2,000 ST, which is contrary to recent economic trends, but domestic stocks rose 2,000 ST, despite continued strong demand here. It is equally interesting to note that prices, which have been in a steady downtrend, seem to have found a level of support most recently. A coincidence? Perhaps, but there are other factors at work, suggesting we may be approaching a major intersection in the market.
First and foremost, with LME week now behind us, the consensus of opinion seems focused on the rapid rise in warehouse stocks; the expectation of further increases due to rising production, coupled with weak Asian demand and little real improvement on the European side. Thus, the price that keeps coming up as people talk about 1998 is somewhere in the 90¢-95¢ range as an average for the full year, down from about $1.05 during 1997.
Given the negative outlook, 95¢ seems a bit optimistic, because if inventories are going to continue building, one would expect prices to continue falling. That is to say, as of last Friday, warehouse stocks stood at 438,321 ST, the highest level since May 1994. But that was when global stocks were falling from their highs. Take a look at your long-term price and inventory comparison chart. The more logical comparison goes back to the fourth quarter of 1992 when inventories rose above 400,000 tons and the price fell below one dollar. Granted, there were other elements in the market at that time, to include massive put options, as well as the handy work of Mr. Harmanaka, but ultimately, it was the weaker fundamentals that did the market in, pushing the spot price down to 72¢ in October 1993 and dragging the annual average down to 85¢ for the full year. So the question here is, if the current surplus is going to grow further resulting in more excess metal, what is magical about 95¢? Logically, one would expect prices to continue falling, similar to the 1993 period. Alternatively, take a look back to the early 1980's when inventories approached the 900,000 ton level, causing prices to be depressed for a protracted period of time.
It is also worth recalling that in the mid 1980's, when prices hovered in the 600 range, the cost of production was up in the 85¢ area, if not higher, resulting in painful losses for producers. Today, the average cost of production is somewhere in the 65¢-70¢ area, with many companies enjoying costs of 35¢-40¢ for electrowon production. And it follows, that one may say the market could fall further than it did fifteen years ago, when production costs were much higher.
That said, we are not suggesting this scenario will begin to unfold, in part because the global market is considerably different today. More specifically, and to the contrary, we believe the demand side of the equation still has a great deal of potential. The current state of weakness in Southeast Asia is temporary and China is a giant, still just beginning to awaken. The North American market is experiencing a strong economy, which in and of itself requires more metal, but demand is strengthened further from the greater intensity of use, dictated by today's electronic age. European economies still have problems, but there are signs of improvement, which will also result in a need for more metal.
Thus, the price could well average 90¢ or more next year, but not because the fundamentals are going to weaken further, but rather, because rising production will be met by growing demand.
Where Do We Stand Now?
–Excepting the sudden spike and subsequent pullback two weeks ago, copper has been stuck in a five-cent range, bounded by 98¢ on the upside and 93¢ down below. Thus, the market seems to be consolidating, if not trying to find a level of support. Technically, the short-term structure is neutral, with perhaps a slight bias toward the upside, as the five-day and twenty-day moving averages crossed, thereby generating a buy signal. Further, the recent drawdown in warehouse stocks, coupled with news of an earthquake in Chile lent support to the market and the prevailing view is that funds are generally short. Thus, it wouldn't take much to get a rally going. How much of a rally, however, is still the question. Assuming the market can build further upon recent gains, it will still have some work to do in order to get past the line of resistance just below 98¢ and then overcome the formidable, and psychologically important, $1.00 level. And after all that, resistance is still in place at 2¢ increments right up to $1.08. On the downside, support is clearly evident at 93¢ basis December, but to state the obvious, sell stops are undoubtedly resting below the recent lows. Thus, a break of 93¢ could quickly bring us down to 90¢, which in turn would suggest a test of the 86¢ low from last September. Our guess is that we take a run at the $1.00 level, before the lows are tested.
–COMEX spreads are narrowing again. Although spot to one-month forward stood at a 70-point contango when the month began, it has nevertheless come into just 45 points. Likewise, the spot to January contango has come into 1.15¢ from 1.60¢ two weeks ago. Dec/Dec'98 has returned to an 85-point back, after being at a 1.6¢ contango earlier in the month.
–Scrap discounts have been fairly steady, with bare bright going for +/—3¢ under spot, while number two carries a 14¢- 16¢ discount to December COMEX.
–Prices have been trading in the 95¢-96¢ range for average 1998.
October 16, 1997J.E. Gross & Associates, Inc.
355 New York Avenue, Huntington, New York
THE ALLENDALE ADVISORY REPORT |
STRATEGY FOCUS |
WEEKLY OUTLOOK
ECONOMIC PERSPECTIVE |
FED STEER PRICES GOING NOWHERE FAST
U.S. ECONOMIC AND INTEREST-RATE OUTLOOK
STICKING WITH THE U.S. TREASURY MARKET |
THE TODD MARKET TIMER
CASH AND BONDS-- THE RODNEY DANGERFIELDS OF FINANCIAL ASSETS?
MYERS ON FUTURES |
THE COPPER JOURNAL |
COMMODITY FUTURES FORECAST WEEKLY REPORT
INTEREST RATE WATCH |
NIKKO MARKET COMMENTS
Copyright 1997, by Consensus Inc. All American and Pan American rights Reserved. editor@consensus-inc.com
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