The copper deficits at 8-10% of total consumption, are just too large to be chopped meaningfully from a "slowdown". And that 8-10% assumes 2004 growth is flat, and judging from the March figures just release by the Chinese, that isn't happening.
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In fact, I can make a good argument, that right now, today, the deficit is running at 12%. Here's how I come up with it. On March 9th, combined LME and Comex inventory was 494,954 MT. Yesterday, April 8th, it was 377,624, a drawdown (*) of 120,330. 120,300 times 12 months is 1,444,000, divided by total consumption (very conservatively) of 12 million= 12% deficit.
Shows YTD drawdowns of various metals:
scrap.org
For sake of being conservative, let say Grasberg comes back to full production in June. They would produce about 200,000 additional tonnes, which knocks the deficit back down to 1,244,000 or 10.3%. For the heck of it, let's assume Chile and Argentina are able (by some miracle) to overcome their natural gas crisis,
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and ramp up another 100,000 tonnes. Actually I can build a good case that the opposite might happen, but being the eternal optimist <g>, that brings the deficit to 1,144,000 tonnes. Then the marginal producers? Since copper is in backwardization, marginal production would have to be profitable at 1.20-1.25. That's not really enough IMO, but let's assume they could mobilize the materials, the equipment, the fuel, what could they produce? Maybe 100,000 tonnes, I doubt it, but being the eternal optimist I'll give it to you, now we're at 1,044,000. Why not just round down and use 1,000,000 tonnes in deficit, or 8.3%. LOL, you'll need one hell of a slowdown.
I think the primary reason Cu is trading in backwardization at 1.20-1.30 is because of head in the sand wishful thinking analysis (TOHOEism: trust of hope over experience(**) ), and the recent stabilization of the USD, which has flushed out some crack-up boom speculators. There is also one important fundamental development that has caused this little correction: Grasberg. If Grasberg comes back on line that's 200,000 additional tonnes. And for analysts that are still using late 1990's consumption numbers, that's fairly significant. From a trading point of view, it's also psychologically bearish. But from a fundamental point of view it only cuts a fifth off the deficit.
So I think the market has already discounted about every optimist scenario imaginable: a future slowdown, specs liquidation (already happening), hyper-optimistic assessment of new supply, Grasberg, etc. Heck, maybe they even believe that Easy Al has invented some alchemy formula to "solve" this problem. I would use a Grasberg positive announcement and sell-off to get on board. If Grasberg is delayed that will be very, very serious stuff.
The one caveat: if we did get a sudden worldwide economy bust (not a slowdown) then Cu could blowoff in a monster top and crash with everything else. In fact a Cu parabolic blow-off will be an important Train Wreck catalyst contributing to the mutha of all busts. But, $1.25 ain't it, nor is the problem solved.
(*) I assume drawdown gets used, equals consumption at some reasonable period of time, because if you're going to just hoard, use something easier to store like silver ($8 an oz) or gold ($420 an oz), not copper at $1.30 a pound.
(**) We are in a new world, one in which very few on Wall Street or anywhere else understands, especially after several decades of disinflation and deflation. The analysis is therefore very flawed, weak, or distracted. |
