What seems to be happening in the copper market is that the short-sellers have been squeezed out. This process has been going on for some time. Indeed, in April the market went into backwardation. This is the reversal of the usual shape of the market, which is a gently upward slope of prices over time. Future prices are usually higher than spot prices, reflecting the cost of financing the storage of the metal. In backwardation, spot prices are higher than futures prices.
Backwardation shows that copper users are finding supplies tight and are thus bidding up the price. It was a feature of the copper market in the last bull run, when Sumitomo effectively penalised people who tried to go short by building up its own huge stockpile of copper and refusing to release it into the market except at a vast profit.
Another sign that the market may be expecting prices to move higher is the switch in US futures positions. The diminishing number of speculators in base metals have switched from holding mostly short futures positions to holding mostly long ones. In London, traders also closed short futures positions. If the traders are out of the market, the fundamentals are likely to shine through.
Fundamentals. It seems that demand for copper is turning out to be stronger than most economists expected. In February, the most recent month for which statistics are available, International Copper Study Group reported that demand for refined copper was 3.4% up year-on-year. In January it had risen by 2.4%.
The biggest increase in demand has come from China, the world's biggest copper user. The ICSG reports that Chinese demand for copper in February was 22.8% up on January's. Japan's demand was up by 19%.
Inventories. The strong demand for copper means that stocks are continuing to fall. The biggest fall is in stocks held in London Metal Exchange (LME) warehouses around the world. There is evidence to suggest that the main reason for the fall is increased shipments to China.
This is because the biggest falls in LME and Comex (the New York commodity market) warehouses was in those in the west of the US, which provide metal for the Chinese market. Stocks in London have risen, though warehouses in Spain are running low.
At the end of June, world copper stocks were down to 1.04mt. At the beginning of the year they stood at around 1.3mt.
On the other hand the US's demand for copper was down by 0.8% in February following a 0.3% decline between December and January.
2002. Figures from the Comisión Chilena del Cobre, show that in 2002 China took 14% of Chile's US$6.28bn in copper exports. The next biggest market was the US with 11.2%, followed by Japan with 11.1% and Italy with 10.3%.
Overall, 46% of Chile's copper exports now go to Asia. A third go to European Union countries. Apart from Italy, France is the other main market, accounting for 7% of Chile's copper exports.
The Americas accounted for 21% of the total exports. Brazil was the next-biggest market after the US, with 3.8% of the total. It was followed by Mexico, which accounted for 3.1%.
Apart from China and Japan, Korea and Taiwan are important markets. South Korea buys 8.8% of Chile's copper exports. Taiwan buys 5.5%.
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