A key factor supporting prices has been the reassessment of the strength of consumption in China this year and the more recent run-down in exchange stocks. Chinese apparent consumption (production + net imports + change in stocks) has generally been a lot higher than most anticipated. This more positive sentiment is perhaps summed up in this article from the UK Telegraph, with Red Kite owner Michael Farmer using the most public of forums to push his bullish views.
While Red Kite have performed well in 2013, it clearly wasn't on the back of being long copper through the entire year, with prices mostly lower since Jan/Feb. The better bet they likely participated in was on rising premiums, which skyrocketed this year as the physical market for copper cathode was squeezed.
Shanghai premiums, however, have shown the first signs of weakness in December, with stricter enforcement of rules against financing and tighter credit conditions reportedly curbing stocking appetite.
Chinese bonded warehouse stocks are also lower over the balance of the year, although stocks are estimated to have risen by ~100kt over the last 3 months and are likely to risen further in December.
Indeed, the more recent fall in exchange stocks does appear to be driven in large part by stock-shifting than being consumed at the moment.
This stock build at consumers is ahead of better seasonal consumption, which will ramp up in 1H14. In China, however, there is some uncertainty about how strong this will be given slower economic growth and tightening policy. To be sure, while better than expected consumption in 2013 has left stocks a bit lower than anticipated at the end of this year, the risks to 2014 consumption rates appear tilted to the downside.
I don't think this is right, as a cancelled warrant in an LME warehouse does not mean that this metal cannot change ownership. Just because metal has been earmarked to leave a warehouse, doesn't mean it has now unavailable to other market participants.
For example, traders looking to profit from high premiums are looking to sell this metal onto end-users.
LME inventories still remain highly concentrated in three locations, although the bottle neck for metal out of Johor hasn't been particularly extreme, with copper in this warehouse now down 155kt since mid June.
Metal is likely to flow much slower out of New Orleans, particularly given it will be increasingly stuck behind deliveries for zinc once new LME rules come into play. Copper stocks in New Orleans are ~100kt higher than December 2012.
This represents a good opportunity as volatility is likely to rise along with divergent views, which is perhaps a good way to play copper in the near term.
For absolute prices, I tend to think they will fall rather than rise. One factor in particular to watch out for in the coming months is the rising availability of refined metal from smelters who look to take advantage of higher TC/RCs as well roll into t2014 contracts. This should shift the balance of excess concentrate stocks into the market for refined metal, although perhaps not immediately.
