Copper still a drag on commodity stocks

Dr Copper continues to languish, last trading under US$3.50/lb with no real bounce in sight. The US$3.60-65/lb support range now seems out of sight. We often acknowledge Dr Copper as the key lead indicator for all other industrial commodities. Gold’s fall is more in line with the expectation that eventually Ben Bernanke will halt the printing presses as the world’s largest economy works through its problems.

The stock market seems to be pricing in that scenario, with the Dow Jones hitting record highs. But copper is the missing piece of the puzzle and the languishing price is taking many quality listed mining exposure – who would be expected to benefit from a global recovery – downwards in price. Despite posting a solid full year earnings number, the world’s largest mining company by revenue BHP Biliton has fallen 4.5% in Australia over the past month.

Stockpiles the key

London Metals Exchange stockpiles show a major increase in warehouse volumes in the past few months. This has the market worried about a short-term period of over-supply. Warehouse levels have increased from around 280,000 tonnes to around 480,000 since the beginning of the year. This is a major increase in such a short period of time.

At 280,000 tonnes, stockpiles were sitting in the bottom quarterly of averages over the past five years. The long term average is somewhere in the order of 400,000 but that is based on a period where the United States and Europe have been languishing in growth and China has been posting 8%+ numbers. The market is worried in the latter but the impact of the former should not be completely diminishing either.

Going forward

Copper could test more downside until the stockpile increase stabilises and demand starts to pick up post Chinese leadership transition and on higher US housing starts. The next major support level is at US$3.30/lb, a rock solid level that could be tested if fear comes back into the market. Catalysts could include more news around Chinese tightening, a miss on US job numbers and political instability in Europe. Worst
case, all three. The spot price bounced the last time the 50 and 200 day moving averages converged in January this year. Unless we see a big bounce over the next few weeks on solid fundamental buying, the next test could not prove as resilient.