Commodities

David Fickling is a Bloomberg Gadfly columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

Suddenly copper, the dullest of the main industrial metals this year with a paltry 4.6 percent gain, is looking a bit shinier.

The metal has jumped 6.1 percent since the start of last week in seven consecutive days of rising prices, its longest rally in 18 months.

Deliver Us
Copper buyers are reserving the biggest volumes of copper in LME warehouses since March 2014
Source: London Metal Exchange, Bloomberg
Note: "Reserved" indicates canceled warrants in LME warehouses; "available" is on-warrant stocks.

That rally seems to be underpinned by real movements of metal. Canceled warrants -- a measure of stocks in the London Metal Exchange's warehouses that have been reserved for delivery by buyers -- hit almost 135,000 metric tons Tuesday, their highest level since March 2014. Nearly 42 percent of the copper cathode stacked in the LME's depots is marked for shipment, up from less than 13 percent at the start of September.

Forward-looking indicators also justify the bullish view. Caixin's manufacturing purchasing managers' index, a closely watched gauge of Chinese industrial activity, rose to 51.2 Tuesday  -- its strongest level since July 2014.

Premium Economy
The margins over spot prices that copper buyers pay for long-term supplies are looking weak
Source: Bloomberg Intelligence

There's just one problem. If everything is looking brighter in the global copper industry, someone forgot to tell the people who produce it.

Copper premiums -- the margin over the spot price that buyers are prepared to pay to secure a long-term supply -- have been weakening for two years, although levels in Shanghai have ticked up modestly in the current quarter.

Codelco, the world's biggest copper producer, has cut its premiums for European sales to their lowest level since 2010, Agnieszka de Sousa and Javier Blas of Bloomberg News reported last week. It's having to offer better terms to Chinese buyers, too, with shorter-term contracts that hew closer to spot prices, Bloomberg's Alfred Cang reported Monday.

Treat Me Nice
Chinese treatment and refining charges are at their highest level in nearly two years
Source: Bloomberg Intelligence

Indeed, the people who are paying more are not copper consumers but producers like Codelco. In China, treatment and refining charges have climbed almost 17 percent this year to about 27 cents a pound. These charges, which are paid by miners, tend to rise when there's an oversupply of the concentrates that smelters turn into refined cathode. It's a similar picture in Europe, where Aurubis, the Continent's biggest smelter, expects treatment charges to be about $7.50 to $12.50 a metric ton higher in 2017 than they've been this year.

Futures pricing is sending the same weak demand signal, with forward curves switching from backwardation to contango over the past six months -- often an indicator that buyers' desire to obtain metal now rather than later is flagging.

Contango in the Night
LME copper's futures curve has switched from backwardation to contango over the past six months
Source: Bloomberg

If demand is looking so weak, why is the amount of available copper in LME warehouses declining so fast? One explanation could be that it's not moving to consumers but to less closely scrutinized warehouses, such as the bonded stores that are used by some Chinese traders to make money from the spread between U.S. and local interest rates.

Metal Mountain
There's still a huge supply of copper locked up in exchange-monitored and off-the-books warehouses
Source: Bloomberg Intelligence

Signs of stronger activity in the Chinese economy can affect copper in two different, contradictory, ways. On the one hand, faster growth could mean that fundamental demand picks up, leading to more metal being consumed in physical products. On the other, the central bank might raise interest rates to take the edge off any incipient asset price bubbles, causing copper to instead be locked away as collateral for the bonded-warehouse carry trade.

Until the pile of metal warehoused in recent years starts to decline more drastically, it will be too soon to declare the end of the copper glut.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
David Fickling in Sydney at dfickling@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net