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Analysis
Macro drivers Supply concerns are providing short-term price support. Workers at Escondida, the world’s largest copper mine, voted to go on strike. The strike could start on February 6, although the company’s request for government mediation may delay the start of any strike by up to between five and ten days. Exports from Freeport’s Grasberg mine in Indonesia remain suspended as negotiations for an export licence continue. LME stocks have been gradually falling from a mid-December peak of 345,475 tonnes; they currently total 259,500 tonnes. The cash/three-month spread was last at $9 contango. A dominant warrant position holder has emerged, accounting for 40-49% of holdings. Cancelled warrants have risen; the proportion of stocks booked for removal stands at 40%. However, longer-dated spreads have also tightened in recent days – the 3m-5y spread was last at $46 backwardation from just $4b a fortnight ago. This suggest some of the recent selling pressure could be producer related. SHFE stocks at 212,925 tonnes are down from their peak of 394,777 tonnes from late in March. Copper premiums were largely unchanged globally as the market slowed in China’s absence and higher exchange prices put consumers off buying physical metal. China’s refined copper production rose by 6% year-on-year in 2016, to 8.43 million tonnes, and copper concentrate imports surged by 27% in the year, suggesting that further boosts to refined copper output are likely. The latest data from the International Copper Study Group (ICSG) showed the refined market recorded a surplus of 48,000 tonnes in October, lowering the January-October 2016 deficit to 64,000 tonnes, compared with a deficit of 89,000 tonnes in the corresponding period of 2015. The ICSG forecasts the market to remain essentially balanced in 2016 and projects a modest surplus of around 160,000 tonnes in 2017. This compares with its forecasts in March for a deficit of 55,000 tonnes and a surplus of 20,000 tonnes for 2016 and 2017, respectively. |
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ConclusionCopper has been buoyed by the threat of supply disruptions. Prices have been supported by rising price support but appear capped and continue to bump into strong resistance at $6,000 per tonne. But with LME warrants tightly held and cancelled warrants increasing, the market could be squeezed higher if supply disruptions emerge. We wonder whether the return of Chinese players tomorrow may be the catalyst for an upside break. |
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All trades or trading strategies mentioned in the report are hypothetical, for illustration only and do not constitute trading recommendations. |