The Copper Squeeze  

Robert Gottliebsen at The Business Spectator has an interesting article on recent falls in the copper price (and wondering if oil may be similarly affected), looking at a possible Chinese squeeze on the hedge funds - China's squeeze on copper.

An important wire article from Bloomberg reporter Xiao Yu unveils some of the Chinese strategic thinking behind the latest fall in copper and other metal prices. Oil may be affected by similar forces. And the Australian dollar is suffering the twin blows of lower commodity prices and likely lower interests rates. If the dollar keeps falling it will underpin our inflation level, thereby making the September Reserve Bank decision more complex.

Xiao’s report starts by quoting the world’s largest appliance exporter Jiangxi Copper on the forces which are hitting demand for copper and other minerals in the current half year.

Jiangxi is cutting purchases of copper as its shipments of air conditioners and fridges slow and says that China’s metal consumption may grow less than 10 percent this year – slower than in 2007. Jiangxi says slowing global economic growth and a rising yuan have sapped China’s export growth, with shipments gaining at a slow pace in the four months to June. At the same time the cost of copper has risen 17 per cent, lifting the costs for manufacturers. China’s manufacturers of appliances and electronics account for 20 per cent of the country’s copper demand. The real driver of global copper demand is Chinese power, which accounts for about half the country’s usage. This demand has been hit by snow storms.

Xiao adds another force hitting copper. Companies like Jiangxi have large stockpiles (Jiangxi has 7,000 tons) and with prices high they have been using up these stockpiles, causing China’s apparent consumption to grow only 2 percent.

So what we are seeing is a four way squeeze on copper – lower global demand, an interruption in China’s power demand, the absorbing of China stockpiles while the price is high and selling by the hedge funds who are being mauled by this process.

My view is that by using their stockpiles at a time of lower demand, the Chinese appear to be using a fortuitous set of events to put the squeeze on the hedge funds. Last night copper fell again in a trading pattern that indicated hedge fund selling. What Xiao is telling us is that the second half of the year China will be back in the market, by which time they will be hoping that the current squeeze will have lead to lower prices.

So this message is similar to that coming from BHP and Rio Tinto – there will be sharp price fluctuations, but the underlying demand created by Chinese urbanisation and industrialisation, plus the difficulty the world is having lifting mineral production, will underpin long-term prices. What we are seeing is a classic squeeze to push the weak holders (badly financed hedge funds) out of the market.