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THE COPPER JOURNAL
Prepared by
J.E. Gross & Associates, Inc.
Stocks Tell The Story
At the end of the day, exchange warehouse stocks generally reflect market balance. Today, the picture ain't so good. During September, COMEX and London Metal Exchange warehouses took in almost 80,000 ST of additional excess metal, making the increase since June now 245,000 ST and bringing us up to a three-year high of 428,355 ST. As for the price, it is hovering at ten-month lows.
With each passing day, it appears the long awaited surplus has finally come upon us and it is difficult to argue otherwise. You can't pickup a newspaper or business publication without reading about problems in the Asian market. Major projects, to include power generating stations, hydroelectric dams and railroad systems are being put on hold, or canceled entirely in Thailand, Malaysia and Indonesia. Japan's economy fell sharply during the second quarter and the recent tankan survey indicates continued weakness until early 1998. Further, the trade has been severely disappointed by China's absence from the market, as hopes for strong buying from this growing region have simply not materialized. In Europe, demand is still reported as weak, despite solid gains in industrial production and expectations of stronger GDP growth. Nevertheless, North America remains strong and the outlook is still positive. But unless or until other parts of the world begin consuming more metal, we can expect inventories to continue rising.
There is some hope, however, and it is found in a recent report from the International Monetary Fund. Although the Fund scaled back its forecast for Japan, Southeast Asia and most developing countries, it nevertheless concluded, that the global economy is about to enjoy what could be its best five-year stretch in the past twenty five years. In part, their optimistic view is based on low global inflation; a reduction of budget deficits; unemployment and capacity utilization rates that will provide growth opportunities for developing countries, as they take pressure off stronger economies, and a view that trade imbalances will not grow to the extent that serious friction develops among major trade partners. The IMF also believes that countries emerging from communism will provide new markets and opportunities, thereby contributing to rising global trade and keeping inflation in check. The report expects GDP in the United States to grow at an inflation adjusted 3.7% this year and 2.6% in 1998, but growth for Japan was scaled back to about 1% during 1997, down from 3.5% in 1996, but is expected to range between 2% and 2.25% next year. Asia as a whole is still projected to be the fastest developing region in the world, with 1997 expected to grow 7.6%, but the agency expects Europe to “just gradually gain momentum.” The IMF is forecasting growth in Germany of 2.3% this year and 2.8% in 1998, while France is forecast to increase 2.2% this year and 2.3% in 1998.
In addition to, or in support of the positive view from the IMF, other events also suggest optimism. In Russia, a country of some 150 million people, Boris Yeltsin called for reforms to regulate private monopolies and promote key sectors of the economy. His efforts are being viewed as “a new set of rules for a new era.” And in China, President Jiang Zemin, meeting with Treasury Secretary Robert Rubin, said he was irreversibly committed to a wide range of economic reforms, many of which were already underway. With a population of 1.2 billion people, and reported copper consumption of just 1.2 million metric tones, China has incredible potential.
Looking ahead, despite today's apparent surplus, it is clear the global market will need more copper. The obvious problem is that supply and demand does not change at the same time, or at the same rate, often resulting in too much, or too little metal. Thus, exchange warehouses become the customer of last resort when demand turns down, or alternatively, the ultimate supplier when all else fails.
Where Do We Stand Now?
–The technical picture is looking increasingly precarious. After trading within a five-cent range of 93¢ to 98¢, copper exploded to the upside, as a short covering rally took us back to a buck basis December. But the run up was short lived, however, as the bears viewed the move as another selling opportunity, pushing the market back down as quickly as it had risen. Thus, we now have a double top at one dollar, with a test of the 93.30¢ low looming on the horizon. Failure to hold the low suggests further losses, but as the weekly chart indicates, consolidation between 86¢ and 96¢ during the July to November period from last year, may provide enough support to prevent a complete meltdown. That said, if support holds in the +/— 90¢ area, the weekly chart also suggests the possibility of a technical correction, with the potential of $1.05 as an upside target. Given the heightened level of uncertainty, this would be a good time to review option costs and strategies.
–Exchange warehouse stocks rose another 78,735 ST or 23% during September, bringing the month end figure to 428,355 ST, representing the highest level since September 1994. Stocks in Europe rose 45,665 ST or 36% to 171,110 ST; Asia was up 3,860 ST or 6% to 72,890 ST, while COMEX and LME inventories in the United States rose 29,210 ST to 184,355 ST, representing a 19% increase.
–Rising stocks and lower prices continues to put pressure on spreads. Spot to one month forward is trading at a +/—90 point contango; Spot to three months at +/—1.40¢, but the far forward spread is still in a back, with December/December '98 at +/—1.50¢.
–Spot copper averaged $.9514 on COMEX during September, off 7¢ from August, but up 4.6¢ from last September. The year to date average now stands at $1.0922, up 1¢ from $1.0815 during the first nine months of 1996.
October 1, 1997J.E. Gross & Associates, Inc.
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