FIs make copper, an industrial metal, into a financial asset

A very interesting facet of the copper industry appeared in a piece written by Andrea Hotter of Dow Jones which sheds new insights into the whole question of whether the global copper market is as tight as the bulls/longs have been so shouting. JP Morgan and Black Rock have been promoting their physical copper ETFs to potential investors on the basis that the copper market is extremely tight, that there are no hidden stocks and that therefore prices will go much higher.
Both groups have made frequent filings to the SEC to obtain approval for their listings. Now comes the bombshell for the bulls. In its latest filings, JP Morgan stated that in addition to the reported circa 568kt in exchange stocks in 2010, there was a further 2.53 million tonnes in the physical market. Black Rock stated that the amount of copper in exchange approved warehouses at the end of 2010 was roughly one-fifth of total global refined copper inventories meaning that the total outside the exchange warehousing system was more than 2.8 million tonnes.

Slowly, the truth on whether the global copper market is really tight is coming out. It illustrates just how large an involvement the financial institutions have in the copper industry. It shows, too, that by throwing money at a market, prices can be driven higher. In the process, however, the delicate balance between supply and the industry’s requirements for a basic material used to produce a range of essential products is destroyed. In short, copper is becoming a financial asset in place of its historic role as an industrial metal.

Markets, however, have a habit of reverting to the mean and destroying false premises. It was only a few years ago that the global financial system nearly went bust because of similar events being played out through the securitisation of mortgages etc. Copper and other commodities will be the next victim in the financial sector’s quest for instruments to sell to unwary investors.
Meanwhile, the copper producers, who have supported these activities, will see markets being lost to new technologies, the use of alternative materials and improved designs etc. Copper’s intensity of use will collapse at a time when the global economy is under stress not just for one or two years, but for a decade, to borrow the reported words of Marius Kloppers, the CEO of BHP Billiton.
When the next credit crisis strikes, which it surely will, the holders of these unreported stocks will want to be cashed up. That moment will coincide with a sharp fall in the global economy and thus underlying copper consumption. What price then for copper? Look at below $2,000 by the end of 2016.
The game being played out by the financial community and others has reaped wonderful immediate profits, but at the expense of future growth and prices. In 2010 dollars, the average copper price of the 20-year period 1990-2010 was $4,500. That is the best average price that can be hoped for over the coming twenty years.

(Edited from an article posted on Mineweb by Simon Hunt, who specialises in copper, global economics and China.)