NEW YORK Much
has been made of the disappearance of copper from Comex
warehouses in the United States, but the simple reality is
production and quality issues in South America have added some
impetus to the movement of metal in the region, with miners
having to buy warrants to ship copper to customers.
This is showing up in
stock data, with copper moving out of Comex warehouses as
producers make up for shortfalls in deliveries to
A year ago, Comex
copper stocks were at about 55,000 short tons. Inventories
peaked at the start of June at a little more than 86,000 short
tons before declining steadily to current levels of 28,000
short tons, almost a five-year low.
A couple of hefty
declines in New Orleans hastened the trend in August, with a
significant portion of this metal moving to a nearby major U.S.
Copper is also going
to countries that are not typical destinations, such as China.
Material has been shipped from the West Coast and New Orleans
over the past few weeks, with the exchange price and freight
numbers stacking up in favor of exports.
have plagued copper miners throughout history, and those being
experienced at the moment are no great shock.
It is a familiar
story: ore grades are dwindling; mines are growing older and
deeper, causing technological issues to arise. Production rates
are stagnating as extraction of ore becomes increasingly
complicated and tricky.
producer Corporación Nacional del Cobre de Chile
(Codelco), for instance, recently said it experienced lower ore
grades at its Chuquicamata and Salvador divisions in the first
half of this year (
amm.com, Sept. 3).
London-based Anglo American Plc said output at its El Soldado
mine, part of its Anglo American Sur joint venture, fell 25
percent in the quarter ended Sept. 30 (
amm.com, Oct. 21).
A key decision will be
how much material producers opt to sell to consumers on annual
Given the increased
potential for lower output than expected, only the riskiest and
perhaps most naive of producers would commit 100 percent of
their projected output under contract, because none of them
want to be in the unfortunate position of having to buy on the
spot market if there is a problem.
Anything left over is
sold in monthly tenders, or its sale discreetly negotiated with
individual, trusted counterparties.
Kennecott Utah Copper,
owned by London-based Rio Tinto Plc, has managed to meet its
contractual obligations to clients in full despite declaring
force majeure after a wall slide at its Bingham Canyon
mine in April (
amm.com, April 16).
According to traders,
it expects to do the same through the rest of the year, and
will start 2014 without force majeure in place.
experiencing problems with quality or output have been a little
less fortunate, and have been making up their obligations from
the spot market.
This means that metal
exiting Comex sheds is not flowing straight into London Metal
Exchange warehouses or into off-warrant storage as some
A portion of the metal
in Comex warehouses could not go on LME warrant if it wanted
to, as the brands are not approved for delivery by the
At the same time, few
owners of LME-approved facilities have any desire to take in
more metal before they know what the LME board will decide in
its warehouse consultation process (
amm.com, July 1).
That decision is
imminent and has left warehouse companies with little appetite
to take in new metal if it is going to lengthen queues and
force them to increase deliveries.
Incentives to attract
metal have therefore dried up, or at least fallen to a far less
attractive-to-financier level; not that merchants are pointing
to a huge amount of metal waiting to go into sheds in the first
Against this backdrop,
investors exits from industrial metals in general and
copper in particular have become evident.
Data released by
Londons ETF Securities Ltd. this week showed that
industrial metals fell more than 8 percent in the third
quarter, the largest drop in assets under management of any
commodity sector, with copper exchange-traded products
accounting for the lions share of the outflows at $196
All of this looks set to change when the result of the LME
warehouse consultation is announced. After weeks of relative
calm, the market can expect an adjustment, and quickly.