Copper inventories rose today. I closed my shorts about an hour ago. A nice profitable trade.
I'm still bearish about the price of copper relative to the marginal cost of mining it given the economic slow-down, but I'll wait for the inventories to confirm my outlook prior to actually trading my outlook.
MontyHigh
I've been waiting for copper inventories to stop falling and start rising for a while. Today is the day.
Copper inventories have been red in this table (indicating falling inventories) for months even while the world economy was contracting (indicating falling demand) and the price was high enough to allow every copper mine in the world to keep producing. This seemingly was defying the laws of supply and demand.
The explanation for this mystery was China stockpiling. Last week (click here) China announced that it had ceased stockpiling copper as the price had risen too high. Now we see that this was not B.S. I expect the price of copper to fall until the Chinese start buying again. It would probably be in their interest, as the world's largest consumer of copper with a huge amount of U.S. dollar cash sitting around, to let the price fall until the copper miners are on the edge of bankrupcy and then to buy into those copper miners at a low price.
In any case, the basics of economics are that prices fall when supply exceeds demand. Rising inventories are a measure of supply exceeding demand. And, as you can see in the chart below, inventories trend for months (much more smoothly than prices). So, I'm short copper and will stay that way until either inventories start trending down or until I am stopped out on price. I'm looking for $2.12 as a first target but expect it will fall to at least $1.80 where copper mining starts becoming unprofitable.
MontyHigh, www.worldofwallstreet.us
Investor Vilage's SevenMileBch brings FCX's has an interesting chart of copper prices and LME inventories to our attention:
This chart says (by my reading):
(a) LME inventories trend very strongly. From this I conclude that the inventory level will probably keep increasing. This is already well understood.
(b) As LME inventories rise, the price of copper, in general, falls. This is already well understood.
(c) The price of $1.50 where we are currently has the same inventory as
the $1.50 copper price was with falling inventory levels. This is an
interesting fact, but is perhaps a coincidence.
(d) If price follows inventory levels and inventory levels keep rising the price could fall well below $1.00 down to even $.75.
(e) My expectation is for copper to fall from its present $1.50 level
down to $1.20. That should be low enough to take a significant amount
of production offline.
I wish I had had enough guts (and cash) to go short copper when it was up there near $1.60 earlier this week.
MontyHigh
Both Copper and Zinc inventory levels jumped higher this week. I expect that early next week I'll go short copper futures to hedge my larger than ever Nord Resources (NRD.TO) position.
A little more on copper. Technically, copper just broke down out of a trading range between $3.50 and $4.00. Together with the inventory levels rising (perhaps partly due to a Chinese Olympic games slow down), I expect copper is going to fall pretty quickly down to the $3.00 range or a little below. Of course, that's just my opinion and I'm hardly a genuine expert. Here's the chart:
One more thing. There's been some disagreement regarding how my graphs interpret the Shanghai Futures Exchange "On Warrant" numbers. I believe they are equivalent to the LME cancelled warrant numbers (meaning they are metal that has already been scheduled to leave the warehouse). Others think they represent the metal which has not yet been scheduled to leave the warehouse. If you want to revise the graphs accordingly you may find my spreadsheet here:Download basemetalinventories20080808.xls (85.0K)
Leave me a comment with your outlook for copper and zinc prices at this point. Or if you have good reason to think I'm misinterpreting the Shanghai "On Warrant" numbers, please give me the reasoning so I can have the opportunity to correct my graphs.
MontyHigh
Nothing much happening this week. What strikes me is that the headline LME numbers are rising pretty strongly and steadily. I'm considering what to do to protect hedge my illiquid copper mine investments.
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
Copper inventories are up three weeks in a row. Despite the bullish price chart, I turn mildly bearish on copper. Looking at the kitcometals five-year inventory chart (click here, not in this post due to copyright concerns), I see that around this time of year the inventory lows were marked in 2005, 2006 and 2007. Still holding my GMI.TO, FMA.TO and NRD.TO, although I'll probably get out next time they make a good pop.
Zinc inventories turned down this week. The price fell into the $.70s and popped back up into the upper $.80s. It looks like $.80 is where support lies at this point. As I write this, the price of zinc has popped up into the $.90s.
For zinc the question remains, how low does the price have to go to start choking off supply. Here's a headline that indicates that $.80 is where this takes place: "China Zinc Producers to Discuss Output Cuts, Executive Says". Zinc bears some watching to see if the bottom is in. I don't think it is, but it may be getting close.
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
Copper inventories are up two weeks in a row. Because of the bullish price chart, I remain neutral on copper rather than going bearish. Looking at the kitcometals five-year inventory chart (click here, not in this post due to copyright concerns), I see that around this time of year the inventory lows were marked in 2005, 2006 and 2007. So, I guess I'm more bearish that neutral. Too bad as I bought a little GMI.TO last week and I guess I'm going to dump it next week.
Zinc inventories continue to rise. For zinc the question is, how low does the price have to go to start choking off supply. I haven't heard of any mine closings yet because of price so I think it has further to fall. 
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
Copper inventories are dithering around. I remain neutral on copper. Zinc inventories rose enough to more than compensate for last week's fall. I remain bearish on zinc.
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
Copper inventories have edged downward four weeks in a row at a gently pace. I turn complete neutral on copper. Zinc inventories fell for the first time in four weeks. I remain bearish but think that the price around $.85 is about where supply destruction takes place on existing mines. With a longer-term view (2 to 3 years), I think zinc is getting close to a buy level, but I'm not buying yet.
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
Copper inventories fell again last week and I've turned from bearish to neutral on copper. Zinc inventories rose again last week (while the zinc price fell). I remain bearish on zinc.
Leave me a comment with your thoughts on the outlook for copper and zinc prices at this point.
MontyHigh
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