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7/1/13

"At what point does the LME system lose its credibility as the centre of price discovery for copper?" Copper inventories and LME's growing problem (from IKN217)

The following was part of our regular coverage of the copper market in The IKN Weekly issue 217, published Sunday evening. The basic story is that there's a growing systematic weakness in the LME system and anyone with exposure to world prices for copper would do well to bear it in mind, because one way or another it's not going to see out 2013.

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We move to inventories and as we’re at the end of another month (time flies once again) we catch up on the state of the world’s stocks via our now-regular charts, but first the weekly update. World stocks dropped by a minor 0,7% last week to stand at a total of 914,518mt. Of that lot, LME inventories rose by a small 0.1% to 665,775mt, Comex stocks dropped by 1.6% to 66,250mt and Shanghai Futures Exchange warehouse stocks dropped 3.5% to 182,493mt.

The month-end totals compare to previous months in this way:




Once again, the strong trend away from Shanghai and towards LME continues. While the two minor warehouse chains see diminishing stocks, the LME’s just keeps growing and growing and has now more than doubled in 2013 alone (and way more than that if you start the count at LME’s lowest point in September 2012, under 220kmt at the time). Stocks at the LME now comprise 72.8% of total World inventories and totally boss the market.

Meanwhile, the strangeness in cancelled warrants grows ever larger, as LME cancelled warrants shot up again last week to stand at 370,375mt, or 55.6% of total stocks. There can be little doubt left that the system is being played by market participants, because if the amount of copper under cancelled warrants was truly sold to end users, it would have left the warehouses by now (note we’re now 12 weeks into the new system noted in IKN207 and eight weeks into the unusually elevated cancelled warrant percentages, which just keep getting higher and higher).


This is where guessing, second-guessing and assumptions that range between reasonable and wild can be floated, but I’m going to avoid (most of) that potential swamp and stay with the most obvious conclusion of all: Somebody, somewhere, seems very keen about keeping a lot of copper away from the market. The way in which this sizeable copper tonnage is being tied up under cancelled warrant and kept away from the warehouse doors by apparently constant recycling of the final delivery warrant means that there are people who don’t want upwards of 300,000 tonnes of copper hitting the market and depressing prices. Now of course that might work and the bet seems to be one of keeping copper prices (artificially?) high until the China re-stocking season rolls around in the Northern autumn and the slack is taken up, but it’s also a game that comes with a ever increasing risk, one that increases with that percentage figure. What, for example, will the world say if 80% of all copper held in LME warehouses were under cancelled warrants but the metal was still leaving the warehouses at its current trickle? Or 90%? Or 95%? Or even 100%? At what point does the LME system lose its credibility as the centre of price discovery for copper? This is high-stakes poker and if it goes against the ones playing this apparent new bet it will finish with a big price jerk to the downside and serious financial losses for the warrant holders.