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The only thing that investors have heard recently about the copper market is that there is vast oversupply ahead as evidenced by a buildup in copper warehouse inventories globally.
Inventories at LME (London Metals Exchange) warehouses have risen in excess of 190% since October alone. Inventories are now at levels not seen since 2003 at more than 590,000 tons.
LME inventories are closely watched by traders and economists alike as a key indicator of global economic strength and activity. Normally, such rising levels of copper in warehouses would be a flashing red light warning about economic weakness ahead globally.
According to the Commodity Futures Trading Commission (CFTC), traders have jumped on this inventory number and have accumulated the highest level of net short positions on copper in over six months.
What's interesting about the 10-year high in LME warehouse stores is that there are two firms holding most of the copper supply.
The two commodities trading companies at the center of the current inventory controversy are among the world's biggest: Glencore International PLC and Trafigura Beheer BV.
They're offering incentives of more than $100 a ton above the current market price of copper for deliveries of copper to warehouses they control.
This attempt to control much of the world's copper supplies has begun to raise howls of protests from both producers and consumers of the metal.
"This is the old warehouse play," Mark Woehnker, president of AmRod Corp., told The Wall Street Journal. "It's a very disconcerting development."
Profiting from the "Warehouse Play" in Copper
Glencore's subsidiary Pacorini has warehouses in New Orleans and Johor, Malaysia while Trafigura's subsidiary North European Marine Services has warehouses in Antwerp, Netherlands. These three locations now hold over 70% of total LME copper inventories.
By holding copper stocks, these companies are making a double profit play on copper.
"Basically they're hovering up any surplus at the moment and earning rent," an analyst who declined to be named told Reuters. "Then when the market hopefully tightens up later in the year, they'll benefit from the premium as well."
The CEO of Chile's Codelco (the world's largest copper producer), Thomas Keller, told Jack Farchy of the Financial Times that such tactics distort the market and that the situation was "prehistoric."
Industrial consumers are also upset with the tactics of Glencore and Trafigura. The worry is that the massive amount of copper tied up in warehouse inventories will not be available for immediate delivery to industrial users.
Copper buyers are already saying that they have been forced to pay sizable fees in order to obtain physical copper because so much of the metal is being diverted to warehouses controlled by these two firms.
"It is already affecting the market," Liu Jiang, a purchasing manager at a copper cable maker in China, told The Wall Street Journal. "The lockup in those three warehouses is reducing copper supply available to the market, and because it's a peak season for copper cable production in China, we're definitely going to be affected."
According to The Journal, fees to get immediate delivery of copper in the U.S. are at a 6-month high of $132 a ton. In Europe, the fees are at a 4-month high of $85 a ton.
The industry is also concerned that if the global economy truly picks up in speed, the inventory situation could create an artificial shortage in copper and drive up prices unnecessarily.
This is becoming more and more like the situation in the aluminum and zinc markets. Users in these markets are being forced to pay high fees to access the physical metal, despite a global oversupply. The fees often offset the benefit of lower prices for the metals.
As Glencore and Trafigura are well aware, demand for copper may pick up later in 2013 as China restocks. Copper exports from China smelters have stopped and inventories in Shanghai are dropping. China is still using lots of copper as it builds out its national power grid.
Leon Westgate at Standard Bank in London told Reuters "that any restocking event, when it emerges, will tighten up the market more quickly than many anticipate."
Translation: rapidly rising prices on any increase in demand for copper.
Investors can tag along with Glencore and Trafigura by purchasing copper exchange traded funds.
At the moment, with trading not yet started on physical copper ETFS, the best bet is to go with an ETF based on copper futures. One such ETF is the United States Copper Index Fund (NYSEArca: CPER). It is currently invested in copper futures contracts for July 2013, September 2013 and December 2013.
- Financial Times:
LME Copper Inventories at 10-Year High
Copper Market Guarded Near-Term
- Financial Times:
The Chatter From Chile's CESCO Week
- The Wall Street Journal:
Two Firms Amass Much of World's Copper Supply
Glencore Fills Malaysia's Johor Warehouses With Copper