Copper Stockpiles Sink Most in 12 Years Amid Traders' Tug of War

(Bloomberg) -- Copper inventories on the London Metal Exchange recorded the biggest weekly drop in more than a decade, a positive sign for market bulls who pushed prices to an almost three-year high, even as others urge caution.

Stockpiles have moved in a sawtooth pattern in the past year amid a tug of war between traders with opposing views of how the market will shape up. The latest figures continue the pattern and investors should avoid viewing them as straightforward evidence that a glut in supply is now over, according to Standard Chartered Plc metals analyst Nicholas Snowdon.

Copper Stockpiles Sink Most in 12 Years Amid Traders' Tug of War

Metal that has left LME warehouses will likely be held in private storage by traders, amid hopes that mine disruptions and rebounding demand will erode a supply glut this year, Snowdon said. “The effect of tighter mine supply will eventually feed through, but that will be more of a story for 2018,” he said.

Barclays Plc has also called the copper rally overhyped, while Bank of America Merrill Lynch said it’s the metal most at risk of a reversal, with the optimism of investors in financial futures disconnected from slow conditions in the physical market.

“When you look at the state of the refined copper market, you certainly question why prices have risen so significantly,” Snowdon said by phone from London.

Stockpiles fell 1.7 percent to 240,825 metric tons on Friday, bringing the drop for the week to 11 percent. That’s the most since October 2005 and marks a seventh straight week of declines. Prices hit $6,747 a ton on Friday, the highest level since November 2014.

China Watch

Investors seeking signs that the market is tightening should watch inventories stored in Shanghai and imports into China, the world’s largest consumer, Snowdon said. 

Both indicators have sent positive signals this week. Stockpiles slumped 8.2 percent on the Shanghai Futures Exchange, and refined copper imports rose 12.8 percent in July, up for a third month following a slump to an 18-month low in April.

Standard Chartered estimates that private inventories held in Shanghai have fallen below 500,000 tons for the first time since early February.

A falling dollar, surge in investor interest and stronger economies are supporting metals prices. Still, after flat demand growth in the first half, it will take some time for the refined copper market to tighten, Snowdon said.

“Getting short in any base metal is risky right now when you have this broad positive macro theme and increasing investor participation, particularly in China’s onshore market,” he said. “This is probably one to stand back from and wait for Chinese macro sentiment to turn.”