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COMMENT: The Comex copper conundrum

Keywords: Tags  Comex, copper, Codelco, ETF Securities, Anglo American, Rio Tinto, Kennecott Utah Copper, warehouse Andrea Hotter

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 consumers.

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. consumer.

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.

Production problems 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.

Chilean copper 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 (, Sept. 3).

Similarly, 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 (, Oct. 21).

A key decision will be how much material producers opt to sell to consumers on annual contracts.

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 (, 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.

Other producers 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 believe.

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 London-based exchange.

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 (, 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 place.

Against this backdrop, investors’ exits from industrial metals in general and copper in particular have become evident.

Data released by London’s 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 lion’s share of the outflows at $196 million.

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.

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