Right now there doesn't seem to be
much rhyme or reason for the run-up in pricing
for copper and other metals.
A new Indian chief was asked by the tribe
whether the winter would be cold or mild. Since
the young chief never learned the ways of his
ancestors, he tells them to collect firewood,
and then he goes off and calls the National
Weather Service. “Will the winter be bad?” he
asks. “Looks like it,” came back the answer. So
the chief tells his people to gather more
firewood. A week later, he calls the National
Weather Service again. “Are you positive the
winter will be very cold?” “Absolutely,” they
said. The chief tells his people to gather even
more firewood, and then he calls the National
Weather Service and again asks, “Are you sure?”
“I am telling you, it's going to be the coldest
winter on record,” said the meteorologist at the
weather service. “How do you know?” the chief
queried. “Because the Indians are gathering
firewood like crazy!” said the meteorologist.
Although I would like to take credit for this
instructive narrative, it actually came from a
recent issue of Readers Digest. But it goes a
long way to putting the metals markets into
perspective. With increasing frequency, analysts
and commentators alike are expressing concern
that the run-up in metal prices is a speculative
bubble building up that will soon burst. Others
believe we are on the verge of a correction that
will bring values more in line with the
underlying fundamentals. Indeed, a look at
inventory levels and prices for most metals
illustrate the challenges we are facing.
Although inventories for most metals have been
rising — with some at multi-year highs — prices
have been climbing almost in lock step.
Where is the logic? We can examine each
component of the sector and hear the argument in
defense of high and rising prices, but at the
end of the day, it isn't very different from the
Indians with the firewood — it's a circular
argument. For copper, it's the same story you
have been hearing for months — the stimulus
program in China requires significant quantities
of metal that have drawn down inventories and
underpinned prices. Automotive production and
sales in China have risen to record highs and
the outlook is for continued growth.
Infrastructure development, be it high-speed
railroads, electrification of rural areas, or
major construction projects all need more metal.
Through May, apparent consumption in China has
risen 910,000 metric tonnes (MT), or 43.5
percent to 3.001 million MT from 2.091 million
MT last year, resulting in a deficit of some
1.390 million MT.
However, what hasn't gotten the same
attention is the significant increase of imports
of refined copper that far exceed the
fundamental shortfall, and again raises the
question of how much metal has gone into the
strategic stockpile. Also, while it's not very
significant in the grand scheme of things,
inventories of copper held in Shanghai
warehouses have risen more than 35,000 MT since
the end of July and are up almost 70,000 MT from
year-end. Elsewhere in the world, demand remains
weak, as global consumption excluding China is
off almost one million MT, or 18 percent,
through May as compared to the year-ago period.
This is hardly the fundamental environment that
warrants copper prices to have more than doubled
over the past eight months.
Aluminum is another case in point.
Inventories held in LME (London Metals Exchange)
warehouses have nearly doubled since December to
a record high 4.61 million MT, yet the price has
risen 25 percent over the same period. The logic
here is that metal held in inventory is being
used for financing, so it's not available to the
market, as if to say it doesn't really exist.
Lead prices and inventories have also been
trending higher over the past nine months. And
last month reports of lead poisoning from
smelters in China have threatened to close the
operations, helping to propel the price back
over the $1 level. Inventories meanwhile have
risen to a seven-year high. Tin and zinc stocks
are also at multi-year highs, while LME
inventories of nickel are at their highest level
since March 1995, yet the price is up 66 percent
The situation in the energy complex is no
less puzzling. Global demand is down,
inventories have been rising to the extent that
storage capacity is a problem, and major new
discoveries of crude oil have been announced.
Last month, however, the spot price for crude
oil was $74 per barrel, up $40, or 118 percent
from the December low of $34 per barrel.
Clearly, this is also at odds with the
fundamentals and begs the question: What is
driving the markets?
Sure, our economy seems to be recovering, and
the global outlook is turning more positive as
well. But we are still a long way off from
seeing levels of demand that lend logical
support to current prices. Perhaps we are simply
in the midst of a technical correction to the
overall decline in values that occurred last
year that just has to play itself out until the
last bear finally capitulates and throws in the
towel. The real problem we face is that we feel
compelled to look for logical reasons for the
market's behavior when we know that oftentimes,
none really exists.
Where do we stand now? Let's take a look at
recent pricing for some key metals. Spot copper
averaged $2.8106 on Comex during August, up 42.5
cents, or 17.8 percent, over $2.3855 in July.
But it was down 62.6 cents, or 18.2 percent,
from $3.4364 last August. The year-to-date
average now stands at $2.0417, off $1.61, or
44.1 percent from $3.6502 during the first eight
months of 2008. Inventories held in Comex and
LME warehouses rose 17,272 MT, or 5.2 percent,
to 348,220 MT, and are up 169,955 MT, or 95.3
percent, from 178,265 MT in stock last August.
The monthly average copper arbitrage narrowed to
a 1.43 cents Comex premium during August, in
from 2.02 cents during July, and a 2.62 cents
LME premium last August. The Base Metals
Barometer rose 15.8 percent during August to an
eleven-month high of 233.3, with all metals
rising during the month and most posting
double-digit percentage gains.
The technical corner. Copper has been trading
within a wide range at the upper end of the
chart, suggesting a heightened level of activity
by speculative investors. On Friday, Aug. 14,
December copper traded up to an eleven month
high of $2.96, but just a few days later, on
Aug. 19, the market had fallen to $2.66, off 30
cents from the previous high. On Friday, Aug.
28, December was back up, trading to a new
recent high of $2.9895, as if in an effort to
break through the $3 level to uncover and touch
off resting buy stops. That attempt failed
however, and again, just a few days later on
Sept. 2, copper was back down to $2.74.
To state the obvious, this is not the
fundamentals at work and serves to demonstrate
the powerful influence of speculative investment
flows. The market has been in overbought
territory for some time now, but it's apparent
that this technical aspect, among others, has
taken a back seat to the sheer weight of money
coming into the market. As you can see on both
the daily and weekly charts, with the market
having already overcome key points of
resistance, the $3 level is the next target to
overcome. In the event copper gets over $3, it
faces a fair amount of resistance in the
$3-to-$3.20 range going back to September of
last year. Conversely, failure to get beyond $3
suggests a move back to $2.75, followed by an
area of support at $2.60. At the risk of
repetition, however, neither the fundamentals
nor technical indicators are playing a major
role in the market now.
John Gross is president of J.E. Gross & Co. Inc,
a metals management and consultancy firm
established in 1987 and publisher of
The Copper Journal, an
industry newsletter he created in 1989. In
addition to his consulting activities, Gross has
worked with global leaders in the metals
industry over the past 35 years. He began his
career in metals in 1973 when he joined U.S.
Metals Refining Co., a division of Amax Inc.,
where he rose to become manager of
administration. In 1981 he joined Hudson Bay
Mining and Smelting as manager of trading and in
1983 became a futures broker with Johnson
Matthey & Wallace, specializing in metals on
Comex and the London Metal Exchange.
Gross is no stranger to the electrical
wholesaling industry, as he was vice president
of strategic metals for the North American
operations of BICC Cables Corp. in 1985 (now
owned by General Cable). More recently, he
was director of metals management with Scott
Brass, a producer and manufacturer of copper and
brass strip products.
To receive a sample
copy of The Copper Journal, give him a call at
(401) 667-0478 or e-mail him at
He is a graduate of Hofstra University in New
York, and a highly decorated Vietnam veteran.
During his business career, he has held
memberships in several trade organizations;
served as a director of the American Copper
Council, and as a member of the Comex Advisory
Committee. Gross is very active in industry
affairs and has written extensively on the metal
markets, industry issues and is frequently
called upon to speak at trade events.