Metal buyers watch the fundamentals of supply and demand, they try to balance what they read about the market against macroeconomic news to get a sense of where they think the markets are going. Yet while the media reports copper's price falls as a loss of faith by investors, the reality is they are being influenced by the same supply and demand judgments used by buyers.
But when investors move en masse, the market moves with them—and so it is with copper.
According to an article in the FT, investors' holdings of commodities fell by a record $63 billion in the second quarter, surpassing even the drop seen at the height of the 2008 financial crisis, the paper quotes Barclays as saying.
Slower growth in China, which accounts for 40% of global demand for copper and steel, has combined with the Fed's announcements regarding tapering of quantitative easing (QE), prompted a rush for the exits by investors.
It should be noted, though, that actual copper imports into China remain robust and above last year's levels—it's the expectation that this won't last that is driving sentiment, not a slowing of current demand.
Barclays' monthly survey of commodity investments is said to show that total assets under management fell to $349 billion at the end of June, the lowest in nearly three years, with April's $63 billion fall surpassing the $57 billion drop of the fourth quarter of 2008, when investors were selling indiscriminately as the financial crisis struck.
Favoring Oil Over Copper?
Some of these funds have been re-allocated into other commodity investments, but still, outflows hit a record of $23 billion. Some of the drop was due to falling prices, but much was because of a wave of selling in precious and other metals, the FT said. Some of the funds have been re-allocated to oil, as the price has rallied in the past month and the oil futures curve has moved to a backwardation.
The European Brent and the U.S. West Texas Intermediate crude markets have moved to parity, while near-dated contracts have moved to a hefty premium to far-dated ones, meaning that investors who sell one contract to buy the next one earn a positive "roll yield" each time.
It would seem the major investment banks are in agreement, scaling back their commodity-related activities and cutting staff—steps that were started months ago—as they saw the trend lines in terms of lower demand and rising supply.
Copper Market Oversupplied
Copper production exceeded demand by 50,000 metric tons in April, according to the International Copper Study Group (ICSG), while the World Bureau of Metal Statistics put the refined copper market in surplus to the tune of nearly 265,000 tons in the first quarter, compared to a nearly 278,000-ton deficit the year before for the same period. The ICSG broadly agrees, quoting a surplus for the first four months of this year of 266,000 tons and a deficit for last year of 429,000 tons.
The Bottom Line
Whoever's figures you take, the swing from many years of deficit to years of surplus following massive investment by mining companies in new mines is clearly here.
Last week, those same analysts at Barclays said copper prices were the most vulnerable to further falls out of all the metals, predicting a fall to $6,000 per metric ton during 2014.
Stuart Burns
Resource Investor
