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.

The optimism of copper bulls seems undimmable.

The supply shortages that were buoying the market a month or so ago are already heading into the past. At Freeport McMoRan Inc.'s Grasberg, the second-biggest copper pit, a concentrate mill that's been suspended for two months amid a dispute with the Indonesian government restarted Tuesday. Then Thursday night, managers and unions at Escondida, the BHP Billiton Ltd.-controlled mine in Chile that's the biggest producer of copper, announced a restart after a six-week strike failed to produce an agreement.

The announcement from Escondida, coming in the middle of the trading day in London, initially caused prices to do exactly what you'd expect: Fall, on the prospect of more supply hitting the market.

Make Up Your Mind
The copper market wasn't sure what to make of the news that its biggest mine was restarting
Source: Bloomberg
Intraday times are displayed in ET.

Within 90 minutes, though, they'd regained the pre-announcement level, and continued to move higher throughout the day before slipping in Asian trading to $5,806 a metric ton at publication time.

One obvious explanation for this is that it ain't over till it's over. Neither workers nor bosses at Escondida have given an inch during the 43-day strike, and the restart is based on a provision of Chile's mining law allowing staff to resume work under their old contract for an 18-month period. In that sense, nothing has been resolved -- and other strikers, such as the ones at a dispute that started earlier this month at Freeport's Cerro Verde mine in neighbouring Peru -- could be emboldened.

The same goes for Indonesia. While activity looks to be increasing at the pit, there remain deep divisions between Jakarta (which plans to take a majority stake in the mine within two years) and Freeport, which has likened the move to expropriation. It would be foolish to bet on a quick resolution.

The risk for bulls, though, is that all this focus on supply problems could be masking the fact that the copper market does not actually appear to be suffering from a problem with supply.

Metal Mountain
Copper inventories tend to be high at this time of year. But rarely this high
Source: Bloomberg

Inventories of the metal in exchange-monitored warehouses tend to rise in the early months before being consumed as Chinese industrial activity climbs toward the middle of the year -- but the amount flowing in looks particularly acute this time around. Tonnage has risen more than 40 percent this year, and earlier this month hit its highest levels since 2013.

There's little evidence that end-users are rushing to get their hands on this stuff. In Shanghai, the premium that buyers were prepared to pay over London Metal Exchange spot prices to access long-term supplies dropped to $45 this month, from $86 in November and barely above its lows last June, when three-month forward prices were below $4,500 a ton. That doesn't look like the behavior of consumers scrambling for supply. Nor does the futures curve, which is in a steepening contango, with cash metal costing about $27.50 a ton less than three-month futures.

Copper's problem in 2017 remains this: Despite its supply problems, demand has never risen to the sort of levels that could justify the scale of its run-up in the closing months of last year. Until that starts to change, this rally is built on shifting sands.

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:
Paul Sillitoe at psillitoe@bloomberg.net