Watch The Backwardation-Contango In Copper

By Glenn Dyer | More Articles by Glenn Dyer

At the start of 2006 copper was $US 2.204c a lb and over the year it averaged $US 3.04 a lb. Copper is now around $US 2.48 a lb and falling after starting the year at $US 2.57 a lb.

At the start of 2006 BHP Billiton was $A25.25 and the other big Australian copper producer, Rio Rinto, was $A 73.25.

BHP Billiton is around $A 24.70 and Rioaround $A71.85.

Copper fell around three per cent in the US overnight.

Whatever way you look at it copper, Rio and BHP had a rollercoaster year in 2006, starting low, going high and sort of ending up back where it all started.

Copper reached a peak of $US 4.04 a lb in May of last year, BHP at $A 32 a share and Rio at $A 88.10. Of course it wasn’t all copper: iron ore and coal, and in the case of BHP, oil and gas as well, added to the mix.

But while iron ore is higher coking coal is lower and oil is off more than 20 per cent so far this year, the two giants are feeling the pressure. And copper is down 20 per cent as well.

Oil was close to $US 50 a barrel in New York, the lowest since May 2005.

Analysts now say that three commodities which have well and truly expunged most of the speculative forces from last year: natural gas, oil and copper.

And along with oil, copper is the bellwether commodity.

There’s nothing wrong with the demand outlook. China and India and Europe are well and truly offsetting the downturn in demand from the US.

But stocks are rising and have been rising since October. Some have ordered the copper and now doesn’t want it or production has suddenly accelerated faster than consumption.

Stocks monitored by metal exchanges in London, Shanghai and New York now total more than 261,000 tones and are up 58 per centover the past three months.

They are now approaching the levels of mid 2004 and have helped drive prices down by around 37 per cent from that record $US 4.04 a pound on May 11.

Perhaps the single largest influence on the demand side has been the fall off in the US housing industry.

But this has come on topof sales by Chinese consumers and official government stockpiles which have helped meet rising demand in China and keep a lid on prices.

The UK based World Bureau of Metal Statistics this week reported that copper production exceeded demand by 353,000 tonnes in the 11 months to the end of November.

Global production rose 5.6 percent from the corresponding period a year earlier and consumption just 1.8 per cent: it’s a classical example of a late stage metals price boom.

Along with the selling out of China, the growing excess of production helped send prices down to $US 5,430 a tonne on the LME earlier this month, the lowest level since last April.

China is now the world’s leading copper consumer. Chinese imports of the metal fell almost 20 per cent in 2006 to 2.1 million metric tons, so there’s every chance that this will be exceeded this year once the supply/demand/price equations become clearer in the next month.

According to traders an index of copper, aluminium and other industrial metals on the London Metal Exchange is down around six per cent so far in 2007, a big fall.

Traders say that a notable feature of the copper, gas and oil markets is the slow but continuing disappearance of the non-industry trader and speculators: hedge and mutual funds and other financial investors.

And in the end their declining participation in metals markets can only be good for producers and consumers alike.

Watch the contango and the backwardation in copper.

Backwardation is the more normal situation when the future price is lower than the spot price. Contango is when the future price is higher than the spot price. That’s a sign of speculators playing in the market and trying to roll forward their yields.

Backwardation is coming. Watch for it, it will tell you more about the state of the commodity markets than any indicator.

Merrill Lynch expects further weakness for the copper market in 2007 with the price expected to average $US 5,292 a tonne over the year. Copper is fast approaching that level now.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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