Wt Copper 1x S Discussion Threads

[spob] 17/2/2010 22:33

Interesting article regarding Aluminium


Speculation heats up aluminium trade

By William MacNamara

FT

Published: February 17 2010 18:56 | Last updated: February 17 2010 19:40

Aluminium used to be something that made aeroplanes and drinks cans. Now it is a financial instrument.

Between 75 and 90 per cent of the world's physical aluminium stocks are tied up in financial arbitrage deals exploiting the difference between the spot and forward price, according to several industry insiders. In November Klaus Kleinfeld, chief executive of Alcoa, described the stocks tied up in financial deals as "almost all".

EDITOR'S CHOICE
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Aluminium is the most extreme example of how some industrial metals are strengthening their role as "hard asset" investments in the aftermath of the financial crisis. But in the process they have become less tethered to basic industrial demand, raising concerns that today's prices are unsustainable and susceptible to unprecedented volatility.

In aluminium, physical stock levels on the London Metal Exchange have quadruped in the past 18 months to about 4.5m tonnes. That amount, enough to build approximately 68,000 Boeing 747s, implies gross oversupply, especially as the pick-up in manufacturing remains slow in developed economies. Yet prices keep rising.

That is because the amount of aluminium actually available for consumption is roughly half that 4.5m tonnes, says Julian Kettle, head of metals research at Brook Hunt. That calculation assumes 90 per cent of stocks are unavailable because of financial deals and allows for an estimated 1-1.2m tonnes of unreported stocks that are suspected to be in China.

Official inventory levels suggest they are running at about 110 days' worth of global aluminium supply, Mr Kettle says, but the real figure is closer to 50 days, which implies a tight market. This de facto tightness, despite the massive supply overhang, helps drive up market prices, which in turn supports more financial deals.

Aluminium speculation is providing returns to investors – at least as long as today's market conditions prevail. The metal, which comes in ingot form like gold, is relatively easy to store. This, combined with today's cheap borrowing, has prompted investors to buy aluminium ingots and store it at today's low warehousing rates.

The aluminium price is in contango. In other words the price for aluminium delivered in three months, for example, is $30 per tonne higher than yesterday's spot price of $2,050 per tonne. This contango creates a lucrative arbitrage opportunity after netting low financing and warehousing costs. Economists at Rio Tinto, owner of aluminium giant Alcan, last week showed that indicative returns from aluminium financing deals hovered between three and five per cent since 2009, assuming financing costs of 0.25 per cent over Libor.

But a looming question is what happens to the aluminium market when interest rates rise and other factors coalesce to make these deals unattractive, releasing metal in to the market for consumption.

"The situation of financing aluminium stocks is obviously not sustainable and is likely to only continue until central banks start to remove the massive liquidity from their economies," says John Meyer, head of resources at Fairfax in London. The reassertion of underlying demand, as manufacturers use more aluminium to make things, is the best way to eat up the excess, although this could take years.

Mr Kettle draws lessons from the market in 1993-94, when rent financing deals pushed aluminium stocks to 120 days of supply. Then, he says, excess stocks were kept off the market for two or three years and drip-fed back in as prices rose slowly and steadily.

"The trick for participants is to bleed this stock back in to the market in an orderly manner when underlying industrial demand picks up," he says.

No market insider is suggesting a rise in interest rates tomorrow would unleash a flood of metal, destroying the market. The stocks are, after all, "tied up" in contracts of varying durations and terms.

"It is not as if there is a huge overhang that could drop in one day and suppress the market," says Alcoa's Mr Kleinfeld.

Meanwhile aluminium smelters are restarting on the back of higher prices, pushing more supply on to the market as some begin to question the financial case for aluminium.

Others argue investment inflows may represent a new form of "fundamental" demand, much as in the gold market. If so this demand comes with grave risks – including the forward curve not continuing to go up.

[contrarian2investor] 17/2/2010 18:40

great find spob.
My long-term thesis remains.

c2i

EDIT: spob the other spin on those cancelled warrants/delivery of copper. Could be the fact that those entities that bought copper sub $2.50- $3 per lb last year are now refusing to buy anymore at inflated prices. Hence the hoarding of copper by the LME will decrease. Just a thought.

[contrarian2investor] 17/2/2010 11:27

Hi all,

IMHO
Copper could face some resistance around the 50% Fib retracement of $3.27 lb. So todays movement and the rest of the week come be critical with regards to the copper's retracement back to its highs.

As SCOP is a long-term play for me I am content to continue to hold and to buy more if/as copper rises.

c2i

[contrarian2investor] 16/2/2010 12:56

Hi all,

February 16, 2010, 06:18 AM EST

Bloomberg update for copper

Commodities Gain

Copper rose above $7,000 a metric ton for the first time since Jan. 28 and nickel advanced to the highest price since Aug. 13


The S&P GSCI Index of 24 commodities climbed 1.2 percent, led by gains in zinc, silver, lead and gold. Copper for delivery in three months advanced $140, or 2 percent, to $7,005 a metric ton and nickel jumped 2.6 percent to $19,850 a ton. Gold for immediate delivery rallied as much as 1.5 percent to $1,117.05 an ounce, the highest price since Jan. 19.

Bookings of metals from aluminum to zinc for shipments out of warehouses registered with the LME picked up this year, according to Michael Widmer, metals strategist at Bank of America-Merrill Lynch in London. Nickel has increased 16 percent since the beginning of last week as planned transfers rose to the highest levels since Feb. 12.

Crude oil for March delivery rose 1.4 percent to $75.16 a barrel on the New York Mercantile Exchange.

c2i

[dnfa1975] 15/2/2010 09:12

Dubai stock market falls on debt fears


Dubai World's property businesses are heavily indebted
Dubai's stock market fell 3.5% after a report said the government's investment vehicle Dubai World may offer only 60 cents on the dollar to creditors.

[spob] 14/2/2010 14:10

I've set up an etf thread for some of the main etf's that can be traded long and short within an isa.

[dnfa1975] 13/2/2010 10:16

Copper, the metal with the Ph. D. in economics, has retreated some 12% over the last 4 weeks. Possible causes include: 1) slowing economic growth; 2) withdrawal of stimulus money worldwide especially in China; 3) supply demand imbalances; and 4) bubble dynamics that has seen excessive speculation in the metal.




Now this article courtesy of Bloomberg and Trader Mark at FundMyMutualFund blog: "Copper Market Set For 'Catastrophe', says Threlkeld". David Threlkeld is president of metals trader Resolved, Inc, and apparently he gained notoriety in 1996 by calling the top in copper. He believes that similar dynamics - excessive supply and speculation -- exist in the current copper market that could lead to prices dropping over 50% from the current levels.

[dnfa1975] 13/2/2010 09:20

how did this close in the us`?

[gb904150] 12/2/2010 12:14

Nice intraday swing so far.



So Euro industrial production and overall growth weaker than expected. An extra 0.5% reserve requirements for Chinese banks.

The signs are still pointing to less liquidity, weak economic growth and USD strength. At least for now.

[gb904150] 11/2/2010 11:47

Unfortunately everything seems to be becoming a bet on whether or not a Greek bailout is going to happen.

Not that a Greek bailout is a desirable or good outcome but news of a deal being close meant markets rallied, USD fell, commodities rise etc.

Investors are having to resort to second guessing the actions of governments - not exactly a stable environment for long term (or good) investment.

thanks for the news posts contrarian.

I think the EU is crazy to consider a bailout...but with their exposure to Greek debt 'contagion' they also have an incentive to keep the party going.

[gb904150] 09/2/2010 10:32

I figure that as a UK based investor it's a good way to hedge/diversify out of GBP.

It's a way to play weak pound fundies, a faltering economy, tightening Chinese (and other) liquidity, bullish USD/GBP, and a weak copper market (high LME stocks and China potentially reluctant to carry on stockpiling).

Look at the Global copper stocks chart - it looks like China built for a bit, now they've got as much as they want for now.

For me it looks like a good 6 month play. I don't think investors will need many reasons to 'sell in May' this year and I think copper is likely to suffer as people/businesses/countries retrench.

[contrarian2investor] 08/2/2010 18:56

Well done spob. A profit is a profit after all. I remain holding SCOP as I only have 60% of my target holding. I did however stop-slice some of my March copper spread-bet.

Hello lurkers your comments/views would be appreciated.

Here are two recent articles that might be of interest:

Copper Collapse Coming?
by: Pacifica Partners February 08, 2010


Another Copper Catastrophe Awaits
by: TraderMark February 02, 2010



Here is an older article that might be of interest:
What Railroads, Copper Are Saying About the U.S. Economy
by: TraderMark January 22, 2010


c2i

[spob] 08/2/2010 06:43

Took copper profits on friday

25% too quick too soon

had to take it - very overweight position

may re enter later

[spob] 04/2/2010 22:19

not wishing for hardship, just accelerated forced selling

i'm sure the speculative element in copper is HUGE right now

just like crude at 147 bucks


Sugar looks ripe also

[contrarian2investor] 04/2/2010 16:46

spob,

Thanks for that. I just wanted to see how popular SCOP was getting, the volumes on the London Stock Exchange have increased over the past week. I don't wish anybody any financial hardship with regards to margin calls. The status quo of trading is that their will always be buyers and sellers

My other copper-related shorts have also been doing well recently.

c2i

[spob] 04/2/2010 14:32

ok counter added, although with the greatest of respect, i personally don't give much thought to the number of people short copper besides myself :)

the more longs facing margin calls, the better

[spob] 03/2/2010 11:34

will do later on

bit busy at the moment

[contrarian2investor] 03/2/2010 10:43

spob,

Please could you add a Vistors counter to the thread, so that we can gauge how many lurkers might be interested in SCOP as an investment. Thanks in advance.


Here is an article that might be of interest:


Copper Market Set for 'Catastrophe,' Threlkeld Says (Update1)
February 02, 2010, 05:13 AM EST

[contrarian2investor] 02/2/2010 12:06

spob,

Here is an article that might be of interest:

Base Metals Correction: Start of a Crash or a Bear Trap?
January 31, 2010



c2i

[contrarian2investor] 01/2/2010 10:59

spob,

Thanks for the heads up. I will add zeal to my links.

Here is an article that might be of interest:

COPPER MARKET
Fifth day of selling in copper as dollar worries eclipse positive US data
Despite reports that the US economy grew at a faster-than-expected 5.7%, copper prices recorded their fifth day of declines

Posted: Monday , 01 Feb 2010



c2i

[spob] 30/1/2010 17:56

@ c2i

Zeal essays are a must read


new essays are published every Friday around 6pm GMT

Without a doubt the best investment analysis on the web