Bulls hit a wall made of tonnes of copper stock

Dubai - How did this happen? Question baffling traders around the world

In spite of copper stock at the London Metal Exchange depleting by 38 per cent to date during the current year, prices of the commodity crashed by over 50 per cent from its highest peak of $10,000 witnessed in. Prices have been decreasing continuously in the last few weeks, reaching $4,631 during the first week of April. However, a quick sharp spike resulted in prices increasing by 12 per cent in the first quarter of this year.
How did this happen? This question is baffling traders around the world. According to some major traders, LME stock has been shipped to China.
As per Chinese customs data, copper import during the first two months of 2016 has increased rapidly as compared to the corresponding period of last year. A probable reason for this phenomenon is that prices of copper in the Chinese domestic market are significantly higher than in the global markets. However, the government has shut down an import window and with imports not being remunerative, importers are keeping stock in the bonded warehouses instead of keeping it on-shore. Thus, bonded warehouses stock has increased to 500,000 ton. However, traders are still trading on the basis of 400,000 tonnes of copper that is worth $2 billion and is lying at the Shanghai Futures Exchange.
The virtual stock in China has reached a new peak of 900,000 ton since May 2014. Bulls who considered it to be a positive fundamental and adopted a net long position, are now in a dilemma. Overall, the long position at the LME has reached its highest level since July 2014.
Copper is a significant commodity in the construction and wiring industry and is considered as the barometer of the Chinese economy. Some bulls believe that the glut of stock in China isn't an indication that demand has slackened but is rather indicative of a complicated arrangement: they say that the stock lying at the Shanghai Exchange is not warranted, i.e., it hasn't been registered through the official receipt but instead has been deposited by Chinese smelters.
The decline in prices suggests that the build-up has been driven by Chinese smelters who have written derivative contracts as a way of generating cash. They believe that it would prove beneficial to make the delivery on the basis of exchange contracts when prices would head northwards. Thus, they are encouraged to deposit their stock at the exchange.
Base metals witnessed mixed movement amid mixed cues. Metals opened on a lower note due to demand uncertainty amid fragile global health. Sentiments soured after the Asian Development Bank lowered its GDP forecast for developing Asian nations from six per cent to 5.7 per cent in 2016 citing a weak recovery in major industrial economies and softer growth prospects for China. Further denting sentiments was China's downgrade by the ratings agency S&P.
Prices also sought support from upbeat manufacturing PMI data from China to the US. Data from China on Friday showed that the Official Manufacturing PMI rose to 50.2 in March as against market expectation of 49.4 and in comparison to February's reading of 49. In the eurozone, final manufacturing PMI improved to 51.6 in March from its 12-month low of 51.2 in February and slightly above its earlier flash estimate of 51.4 while the German manufacturing PMI rose to 50.7 in March from a 15-month low of 50.5 in February. Meanwhile in the US too, the ISM manufacturing PMI rose to 51.8 in March from 49.5 in February. Apart from upbeat factory activity data, other major releases from the region showed that the economy is growing at a healthy pace.
The writer is the manager of commodities market at Emirates NBD Securities. Views expressed are his own and do not reflect the newspaper's policy.