Copper Rally Reversing as Glut Expands to ’01 High: Commodities – by Agnieszka Troszkiewicz & Maria Kolesnikova (Bloomberg News – September 3, 2013)

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The biggest rally in copper in three months is reversing as analysts predict that the largest glut in 13 years will overwhelm consumption from an accelerating Chinese economy, which uses two in every five tons.

Production will exceed demand by 408,000 metric tons next year, the most since 2001, compared with 167,000 tons in 2013, the average of 15 analyst estimates compiled by Bloomberg shows. Futures rose 3.2 percent in August, the most in three months, on signs of an expansion in Chinese manufacturing. Prices will drop 6.1 percent to $6,800 a ton by the end of December, the median of 13 analyst and trader predictions shows.

Copper is falling with all other metals this year after a decade when prices rose fivefold. Producers from Rio Tinto Group to BHP Billiton Ltd. added 3.4 million tons to output since 2003, about what Europe uses in a year, and Morgan Stanley expects another 4.1 million tons by 2017. While prices are 29 percent below the record set in 2011, they are still about 50 percent higher than what the costliest mines need to break even, Macquarie Group Ltd. estimates.

“We’re having this big wave of copper supply growth,” said David Wilson, an analyst at Citigroup Inc. in London who has followed metals for almost two decades. “The underlying data in China is OK but it doesn’t suggest surging demand. Mine projects and refinery expansion projects that are happening at the moment are not going to get stopped.”

Industrial Metals

Copper for delivery in three months fell 8.7 percent to $7,239 a ton this year on the London Metal Exchange, as the LMEX index of six industrial metals declined 10 percent and the Standard & Poor’s GSCI gauge of 24 commodities advanced 1.6 percent, led by crude oil and cotton. The MSCI All-Country World Index of equities gained 8.1 percent and the Bloomberg U.S. Treasury Bond Index lost 3.3 percent.

Futures rebounded from this year’s loss of as much as 17 percent in part because of disruptions including mining accidents, a refinery outage and declining supplies of scrap metal in China. Some of that is now reversing, with Freeport-McMoRan Copper & Gold Inc. (FCX) saying yesterday it ended force majeure on deliveries from the world’s second-biggest copper mine, Grasberg in Indonesia, after the collapse of a tunnel in May halted work.

Bearish Bets

Supply from refineries will advance 5.2 percent to a record 21.84 million tons next year as consumption expands 2.8 percent to an all-time high of 21.42 million tons, Morgan Stanley estimates. Prices rose since June mainly because traders bought contracts to close out bearish bets and investors should take advantage of the rally to sell because the surplus will widen over the next 12 months, Macquarie said in a report Aug. 30.

Hedge funds and other speculators reduced short contracts wagering on a decline in eight of the past nine weeks, U.S. Commodity Futures Trading Commission data show. They also increased their long contracts in six of those weeks, having been the most bearish in at least seven years in April. They now hold a net-long position of 13,043 futures and options, about three times the average over the past five years.

A gauge of manufacturing in the 17-nation euro area exceeded 50 in July for the first time in two years, signaling expansion, and rose again in August, London-based Markit Economics said Aug. 1 and yesterday. The single-currency bloc emerged from a record-long recession in the second quarter. U.S. factory output rose at the fastest pace in more than two years in July. Europe accounts for 17 percent of copper demand and North America 11 percent, Barclays estimates.
Bonded Warehouses

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