What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...

We have been fairly aggressive on our long copper call in 2009. In fact, on February 25th we sent the following note to a client when he asked us what we though about copper:

"This is like holding a massively inflating ball of air, under water - if it gets through 1.54, that's going to ring the bell of every short seller from here to Dubai...

Very simply,

  • 1. China buying on the LME now, direct - for their Strategic Reserve
  • 2. All of mining is cutting capex for Wall Street's sake - supply coming online in the out years coming down = commodity inflation in the long term
  • 3. Economic should and will continue to see a sequential acceleration from Q4 2008

We see this as a buy for a Trade at $1.49/lb and a breakout for a Trend (3 months plus) at $1.54/lb"

The rest as they say is history, but copper is now at a much higher price and some recent price action has us more cautions.  After all, even an early recovery indicator that The Client (China) needs, such as copper, has a price.

We have an expression (to be fair, we have many expressions) at Research Edge and we say, "She / He has the Conch", which effectively means that whomever has the conch has the voice or the floor to continue to own the debate.  When it comes to copper, China has the Conch.  In fact, in the year-to-date the correlation between the Chinese stock market and copper is 0.88.

In the chart below we've outlined the performance of the Shanghai SE Composite versus front month COMEX Copper YTD, which shows this relationship graphically as well.  Below that chart we highlight copper imports into China, which provide the underpinning of the fundamental case for copper from a demand perspective, which is that year-over-year imports into China are up in February by 45%, March by 55%, and April by 62%.

As is always the case with China, people debate whether the data is real or whether the commodity is being stockpiled versus used in actual economic activity.   To some extent, it doesn't matter in the short term as demand is demand.  Longer term it will certainly be more relevant.  The Chinese are many things, economically irrational, I don't think so.  They are buying copper either because they need it, or because it is cheap.

The recent move in copper (breaking down through our TRADE line of support of 2.08/lbs) may be actually indicating that demand from China may be peaking.  Regardless, and in the short term at least, watch the Chinese when it comes to copper because until the facts change, they have the conch.

Daryl G. Jones

Managing Director

What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...  - conch