The Reason For Copper's Dramatic Surge: Chinese Copper Inventories Hit Record

Two weeks ago we reported that one month after China created a record $520 billion in total credit (TSF), through February 18 Chinese banks had followed through with another CNY2 trillion according to MarketNews, meaning that in the first two months of the year China will have created a gargantuan $1 trillion in new credit between loans and unregulated shadow banking issues.

A question that emerged is what China is spending all this newly created money on. One answer emerged overnight when Bloomberg reported that after tumbling in the first half of 2015, copper inventories at the Shanghai Futures Exchange had been steadily rising, and in the most recent week soared by 11% to an all time high of 305,106 tons.

At the same time reserves at the London Metals Exchange declined for 11 days to the lowest level in more than a year, in other words China is shifting idle inventory from Point A to Point B.

Bloomberg adds that as a result of this massive spending spree, inventories tracked by the Shanghai Futures Exchange are higher than stockpiles monitored by the London Metal Exchange for the first time in a more than a decade.

This explains two things:

• for all talk of reform, China is once again building a bubble in excess capacity and stockpiling surplus commodities, which will likely last as long as China floods the economy with newly created bank loans;
• The recent surge in the price of copper, which has been a direct function of China's recent massive restocking

Most importantly, this means that the world is now back to the "old regime" China, where it was stockpiling massive amounts of inventory as only possible the "use of capital" of trillions in new money created, which of course is precisely the "regime" that created the hard landing scenario that China finds itself in at this very moment.

And so, can kicked. The only question is for how long.

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What commodity markets want from FM

Traders seek, among other things, CTT abolition to improve volumes

The Indian markets are gearing up for the big event today — the Union Budget. We take a look at what the commodity market participants expect from it.

Commodity Transaction Tax

If there is one wish that tops the list for almost all participants in the commodity sector, it is the removal of the commodity transaction tax (CTT) that was introduced in July 2013. This tax is levied on the sale transaction of the commodity futures except for exempted agricultural commodities such as chana, soyabean, turmeric, etc.

The introduction of this tax has taken trading volumes sharply lower in both the Multi Commodity Exchange (MCX) and the National Commodity and Derivatives Exchange (NCDEX). PK Singhal, Joint MD, MCX, says, “CTT has increased the cost of trading derivatives by almost 300 per cent and trading volumes have come down more than 50 per cent after its introduction.”

Singhal also adds that the increased trading cost has moved the domestic trading business to offshore markets like Dubai and Singapore. Data from MCX shows that trading volumes have declined from an average ₹149 lakh crore in 20011-12 to ₹54 lakh crore in 2014-15. In NCDEX, the volumes have slumped from an average ₹18.22 lakh crore in 2011-12 to ₹10.22 lakh crore in 2014-15.

Some of these volume declines are also a result of the commodity price meltdown. NCDEX too expects some relief on CTT for processed agri-commodities like sugar and soyaoil.

Import duty change demands

Hareesh V, Research Head, Geofin Comtrade, says the gold and gem industry is expecting a reduction in import duty on gold to 2 per cent from 10 per cent.

Increasing the gold import duty in August 2013 was one of the several measures the government had taken in order to bring down the current account deficit (CAD). India’s CAD has improved from $21.8 billion in June 2013 to $8.2 billion as of September 2015.

Other expectations

Hareesh adds that in order to protect domestic growers from cheap imports, the rubber industry is expecting an increase in the import duty on natural rubber to 40 per cent from 25 per cent. Similarly, an import duty cut to 5 per cent from 30 per cent is expected for oilseeds.

Sushil Sinha, Head of Karvy Comtrade, wants the Centre to introduce measures to help companies hedge their commodity exposure risk. He also wishes that the Centre allocates more fund and speeds up the process of setting up a national unified agri-commodity market.

He also wants improvement to infrastructure in terms of warehouses, testing labs, research, etc. Sinha believes participation in the commodity market will improve if a clearing and settlement corporation comes up for commodities, like the one prevailing for equities.

NCDEX wants the Budget to introduce measures to allow banks and asset management companies to invest in the commodity futures market.

Also, with commodity market regulation being taken over by the Securities and Exchange Board of India, NCDEX expects the introduction of new products like options and new indices, going forward.

Source:thehindubusinessline

ICSG releases February 2016 Copper Bulletin

The International Copper Study Group (ICSG) has released preliminary data for the month of November last year in its February 2016 Copper Bulletin. According to preliminary ICSG data, copper production and usage data points to a marginal production deficit of nearly 25,000 metric tonnes.

The refined copper market balance for the month of November ‘15 showed an apparent production deficit of nearly 25,000 metric tonnes. The production deficit for the month, after making seasonal adjustments for global refined copper production and usage, stood at 20,000 metric tonnes. The refined copper balance for the initial eleven months of the year ended in production surplus of around 50,000 metric tonnes as compared with a deficit of around 545,000 tonnes during the corresponding period in 2014.

World refined production increased by nearly 1.6% (nearly 330,000 t) during the first eleven months of 2015. Primary production was up 2%, whereas the secondary production held steady. The refined copper production during the month witnessed significant growth of 4.0% in China. The production by the US witnessed an increase of 1.5%. On the other hand, the refined copper output by Chile and Japan dropped by 1.5% and 4% respectively. The African and Asian region recorded 3% rise in refined copper production each. On the other hand, refined output declined by 5% in the Oceania region.

The world copper mine production has increased by around 3.5% (nearly 580,000 t) during the first eleven months of 2015. Concentrate production was up 4% during the period. The mine output from Peru and Indonesia recovered during this period. The mine production by Peru-the world’s third largest copper mine producer, increased by 19%. The production increased marginally by 0.8% and 2% in Chile and the US respectively. Region-wise, Asia recorded 8% rise in production. Also South America and North America recorded 4% and 2% increased output respectively. On the other hand, Africa and Oceania region recorded production decline of 1% and 3.5% respectively.

Meantime, global usage of the metal is estimated to have declined by around 1% (nearly 260,000 t) during January to November in 2015. The Chinese apparent demand increased marginally by nearly 2%. The usage by world countries excluding China has dropped by 4%. The Russian apparent usage dropped sharply by 48% whereas the EU demand declined 4%. Japanese apparent demand too witnessed sharp decline of 7%.

Gold and the 34-Month Moving Average

Gold gave up $8.70 last week (after the previous week's gain of $81.30/oz.) to close at 1,230 and printed a bearish harami candlestick on the weekly chart. Friday's close was on resistance at 1,230. Look for support at 1,190.

A breakout from the 34-month exponential moving average (chart) would be very bullish. Assuming a breakout, our price target is 1,370.

Cycles

A 4yr cycle low is due in the first half of 2016 possibly as early as Feb/March but It looks increasingly as if it may have arrived last December. Wait for a breakout from the 34-month moving average to make that decision. Weekly cycles point to a high in late March.

By: Ed Carlson