Copper exchange stocks approaching pre-crisis levels

Copper exchange stocks have finished May at the lowest levels since prior to the 2008 financial crisis. With the forward curve in backwardation, premiums relatively high and cancelled warrants large, market fundamentals would suggest bullish momentum for prices.

Much of this, however, only tells is that the market has been tight and is not really forward looking.  The next few months look more concerning given seasonally slower production and wobbly Chinese macroeconomic data.

While exchange stocks are very low, some of this has been shifted into Chinese bonded warehouses. This inventory isn't really as liquid as exchange warehouses, as a sizeable proportion is used for financing.  But its also not really consumption either given these deals can be unwound quickly.

Bonded warehouse inventory is estimated to have fallen a little in May after rising through the first 4 months of the year. It is also speculated that some of this inventory has been absorbed by the SRB when prices were quite a bit lower.

Even though apparent consumption has been strong at exchange stocks low, prices have not been particularly strong.  They have bounced back from the low point in March when financing fears shocked the market, but haven't managed to meaningfully reclaim prices seen prior to that.

The Cash-3m backwardation has widened over the past few weeks, although there are some tentative signs that this may have run its course. For example, Chinese premiums looked to have weakened by ~$10/t following the Dragon boat holiday. This appears to be in part due to a probe into false import receipts for financing at the Chinese port of Qingdao.

Indeed, for all the discussion of better than expected copper fundamentals over the last 6-9 months, it has been close to the worst performing base metal.  Nickel is clearly the standout out, but even aluminium has faired better than copper.

The lesson here is perhaps not to get too bogged down in the nitty gritty of metal S&Ds at the expense of macroeconomic factors, which have impacted copper more than other metals.  Perhaps it is for this reason that copper may hold up better when the Chinese data weaken more meaningfully, given it has already had more of an adjustment than metals like zinc.