There's a funny thing about the 20 percent surge in copper prices over the past two months.
While there's a great theory about coming demand for the metal -- a U.S. Congress that's decided to stimulate rather than starve the economy now a Republican is in office, and a fillip for Chinese exports from a declining yuan -- there's precious little evidence that consumption is actually picking up.
Purchasing managers' indexes for U.S. and Chinese manufacturers -- closely watched indicators of where physical commodity demand is headed -- are both in positive territory, but only modestly so.
Housing construction, another key area for copper demand, looks little better, either in the U.S. or China. U.S. performance was the best since 2007 in October, only to crash back to earth last month:
Indeed, the strongest indicators have come from the copper market itself. Cancelled warrants, a measure of tonnage marked for delivery in exchange warehouses, have soared of late. In New Orleans, the measure recently hit its highest level since 2014, and in South Korea it's touched a record from 13 years of data.
As Gadfly has argued before, a supply crunch rather than a demand surge is a much better explanation for what's going on. If further evidence was needed, keep an eye on events in the Democratic Republic of Congo, a top-five copper producer that's entering a political crisis.
With President Joseph Kabila refusing to step down after a 15-year term, security forces and protesters are reported to be digging in for clashes Monday, the day his term in office officially ends. Kabila's family hails from Congo's southeastern copper belt, and has a web of business interests catalogued by Michael Kavanagh, Thomas Wilson and Franz Wild of Bloomberg News that may be threatened if he were to lose power.
The risk for the copper market is that the tensions return the country's metal output to the levels of the early 2000s, when the deadliest conflict since World War II left production at less than 10 percent of its current level.
There are other areas of political risk, too. An Indonesian license permitting shipments of ore concentrates from the world's second-biggest copper pit -- Freeport-McMoRan Inc.'s Grasberg -- expires Jan. 11, and may not be renewed in time to avert disruptions, according to consultancy CRU Group.
Worldwide, some 62,000 fewer metric tons will come to market in 2017 than previously expected, and supply will rise only 1.3 percent compared to 4.2 percent this year, according to Bloomberg Intelligence analysts Kenneth W. Hoffman and Zhou Zhang. They forecast supply will climb more sharply from 2018 to 2020.
In the context of a coming crunch in supply, some bullish factors for copper make more sense. While near-term prices have risen close to backwardation levels over the past month -- a traditional sign of fundamental demand, where short-term contracts cost more than longer-term ones -- forward prices start to fall off again around September next year.
That fits much better with a picture of weak supply in the short term followed by recovery a year from now as output from the big Andean pits ramps up. Copper may see some good times in 2017 -- but until demand from China and the U.S. shows stronger signs of life, don't count on it lasting.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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