Copper stability to be shaken soon

Copper prices have been range bound for a couple of months with premiums also remaining sticky at high levels.  This has allowed annual contracts to be negotiated on much higher terms than last year.

This is a bit of a surprise for a commodity for which the vast majority of analysts are bearish given a looming surplus in 2014. To be sure, the evidence of stronger mine supply is already evident in the rise in TC/RCs, which are up over 30% on annual contracts.

For now, however, it seems there is enough happening on the demand side to keep prices stable.  Total exchange stocks, while still relatively high, have come down fairly quickly over the past month or so.

This has eroded some of the queue for metal seen at key warehouses, with Johor in Malaysia accounting for most of the draw at LME warehouses.  Its also notable that SHFE inventories fell significantly last week.

Some of this is likely to be shifting of tonnes into less visible inventory in China, which is likely to be reported as rising significantly in the next couple of months.  But considering that these stocks fell by ~600kt into August, there probably isn't so much alarm about gains here just yet while demand growth still looks decent.

Chinese demand has often been the key factor catching a falling copper price, with renewed Chinese stocking interest picking up supply when the rest of the world is week. This year has been an example of this.

Prices usually recover when demand from the rest of the world comes back.  And it seems likely that ex-China demand will be growing faster next year in line with a wide range of leading indicators.

But the key differentiating factor next year compared to the last 5 or so is that supply is scheduled to be quite a bit stronger again. This means that China will have to absorb more ex-China supply, even with better demand elsewhere.

Chinese imports have been strong in past 3 or so months as prices have dropped. The current lack of arb into SHFE prices will sap appetite for imports, but the copper market can ill afford to loose Chinese interest.

Part of the strength in refined and unwrought imports is due to lower availability of scrap, which down 12%YoY in the last 3 months and 10% in the YTD.

Scrap availability should improve along with manufacturing in Europe.  This is not a negative for copper prices, as on net total copper consumption is rising.  But greater scrap availability may impact premiums into China.

The most visible impact of stronger ex-China mine supply has been on the big jump in concentrate imports, which are up 34%YoY YTD.

When estimating for copper content of these different imports, total imports are up a slow 2%YoY YTD, but are clearly much stronger in the last 3 months.

The challenge for 2014 is that for the year as a whole, China will have to absorb more supply than for the balance of 2013.

To be sure, mine supply is likely to grow faster than ex-China demand, which while better is still not particularly fast thanks to the tepid bounce in Europe.

So copper's resilience doesn't look likely to last too much longer.