Global copper stocks are "dangerously low"

Source: Wall Street

Author:Wang Mei

LME copper stocks hit their lowest level since 1974 on Friday, pushing copper prices back above $10000 a tonne. Earlier, Goldman Sachs Group pointed out that copper is the most undervalued commodity at present, and the mispricing in the market is due to ignoring the important factor of inventory reduction.

London Metal Exchange (LME) copper inventories hit their lowest level since 1974 on Friday, as global supply tensions escalated sharply, sending copper futures spreads soaring, pushing copper prices to their biggest weekly rise since 2016 (9 per cent) and rebounding to more than $10000 a tonne, about the same as Goldman Sachs Group's forecast for the end of the year.

Existing copper stocks tracked by LME warehouses plunged 89% this month after a surge in metal orders in European warehouses, with only 14150 tons of copper freely available in LME warehouses on Friday, while the industry consumes about 25 million tons a year, according to Bloomberg. Inventories on major exchanges and private warehouses are also falling rapidly, LME copper futures have reached a historic premium, and recent contracts are trading at a record premium.

On Friday morning, the price of the LME copper contract expiring tomorrow was as high as $175, the highest since 1998, before narrowing to $5, but closed at just $1 on Monday.

Meanwhile, the long-term spread between spot and three-month copper contracts soared to $350 a tonne, the highest level on record.

The last time this happened was in 2006, when a buying spree triggered by China's economic boom consumed LME copper stocks to near historic lows. LME inventory levels are even lower than they were then.

Goldman Sachs Group: the market ignores the important factor of inventory reduction.

The decline in global copper inventories and strong demand contrasts sharply with concerns about the macroeconomic outlook and the risk that stagflation and power shortages could derail the trajectory of strong global growth.

Wall Street mentioned earlier that mainly because the energy crisis could trigger a new round of stagflation, Citi's commodity research team earlier warned that copper demand would shrink in the next three months and copper prices would fall another 10%.

However, Goldman Sachs Group pointed out in his latest report that copper is the most undervalued commodity at the moment, and the mispricing in the market is due to ignoring the important factor of inventory reduction.

At present, copper inventories in the spot market are declining rapidly, falling by nearly 40 per cent in the past four months. Global copper inventories are likely to reach an all-time low by the end of the year and are expected to run out in the second quarter of 2022 if copper prices remain low. At the same time, the decline in inventories, coupled with the need for delivery of futures contracts, will further reduce the supply of copper, which will eventually lead to a rise in copper prices.

Goldman Sachs Group believes that the power shortage, the decreasing trend of scrap copper supply in the second half of the year, and the multi-quarter stagnation of copper mining will affect the spot supply of copper, and it expects that there will be a serious imbalance between supply and demand in the copper market. it raised its forecast for copper prices by the end of the year to $10500 / ton.

Analysts say that while the decline in inventories on major exchanges suggests a fundamental mismatch between supply and demand, if owners who have asked for spot copper in recent days decide to take advantage of the surge in spot prices to ship it back, there may be some relief in the short term.

At present, about 167200 tons of copper is planned to be removed from the LME warehouse.But a sharp spot premium could prompt some owners to immediately sell their copper holdings on exchanges and later use lower-priced futures contracts to buy back copper.

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