Let’s count the copper with dust on it | FT Alphaville

Let’s count the copper with dust on it

Michael Robinson over at the BBC’s World Service has been investigating high global commodity prices in a series entitled Bubble Trouble?

In this week’s episode Robinson looks at the copper market and in particular the scale of potential copper shenanigans that may or may not be going on in the market.

Now, if you’ve been following the copper story, it’s really worth a listen.

In the documentary, Traderight’s Steven Spencer and independent copper analyst Simon Hunt make the argument that there’s a lot more (hidden) copper inventory in the world than most bank analysts care to admit — largely due to Chinese cheap financing strategies.

Barclays Capital’s Gayle Berry, meanwhile, argues the opposite, saying people like Simon Hunt are misinterpreting the supply and demand situation.

“They don’t fully understand that you need to have an increase in the stocks for a market to operate efficiently. It’s there but in different forms than is being suggested. It’s inventory that needs to be held as part of the supply chain,” she tells Robinson. “They fundamentally misunderstand the workings of the copper market.”

Berry predicts copper prices are likely to go to $13,000 per tonne by the end of the year, saying the current price of over $9,140 per tonne is a fantastic buying opportunity.

Hunt’s view is that the true price — based on the all the surplus hidden inventory that’s out there — lies nearer $4,000-$5,000 per tonne.

But none of that is the best bit of the documentary. The best bit comes in Robinson’s interview with the head of metals at independent warehouse company Steinweg, in Rotterdam.

Robinson explains how at first you might think it’s pretty straightforward to count world inventory because the London Metal Exchange publishes daily statistics for how much copper is held in its registered warehouses — one of which is Steinweg.

As he soon discovers, it’s not.

Here’s a transcript of what follows, with our emphasis (Michael Robinson is MR and Steinweg’s head of metals John van der Lek is ST):

MR: …when we looked more closely we began to enter a world of smoke and mirrors.

MR: John Van der Lek is head of metals at the international group of commodity warehouses Steinweg. Steinweg is a venerable name in commodities. Established in 1847 the company has expansive warehousing facilities around the world, headquarteredin the great port of Rotterdam.

MR: “Into the warehouse.”

MR: The Steinweg group is authorised to hold LME-registered copper. Given how tight bank analysts said stocks were I was surprised to see so much of it. And after all it was only one of Steinweg’s many warehouses around the world. But then John Van Der Lek explained another statistical problem. Not all the copper in the warehouse would show up on the official LME stocks. Under warrant as they say in the jargon.

ST: We have two kinds of numbers in our warehouse. The warrant numbers which are given by the LME, and our own numbers for our own administration.

MR: In fact it turned out that only about 40% of the copper was on the LME’s official stocks, and therefore visible to the market. Strict discretion prevented John Van Der Lek from telling me who owned the off-market copper or how long it had been in the warehouse. But there were some clues.

MR: “These ones have been here a long time, there’s a lot of dust on these. This is a bit dusty. How long have these been here?”

ST: “That can be, maybe half a year or a year.”

MR: “So if there’s big demand for copper how come it’s sitting here for half a year?”

ST: “We don’t know. We are not traders. We like it to be in the warehouse for as long as possible. Rent is the lifeline of our company.”

MR: “But let’s do the dust test. This copper is very very dusty, that’s been here a long time. Let’s look over here, this big pile, and oooh and this one is pretty dusty too.

ST: “But you must imagine there are forklifts driving around here. All this fine dust that goes onto the bundles.”

MR: “But there’s a lot of copper here with dust on it.”

ST: “So you take the decision it has been here for a long time?”

MR: “What do you think?”

ST: “Could be that you are right (laughing).

Robinson then asks Van der Lek about the rising trend in his industry for banks and trading companies to buy up warehousing companies.

While he’s not that keen to talk about it, he does admit that from a customer point of view there is competitive advantage in remaining independent.

Here’s the exchange anyway:

MR: Steinweg is the last independent warehouse. Does it give them [the banks which own warehouses] an unfair advantage?

MR: John van der Lek told me he’s relieved that the Steinweg group is still independent, he says he’d like to avoid any suspicion of conflict of interest.

MR: “But what’s wrong with a bank owning a warehouse?”

ST: “I don’t know why they want to own warehouses. There must be a reason for that. But I don’t know why they do.”

MR: “Is it good business for a bank?”

ST: “Could be, but I don’t know, I don’t think so. I don’t have an idea what their feeling for taking over a warehouse.”

MR: “The danger is pretty obvious. That the bank has more information than other traders because it owns a warehouse?”

ST: “Yeah. That is to a danger for the traders. Maybe so we’re in a situation where people get more information out of the warehouses, but we are here independent and we would like to keep it that way. And we hope our customers appreciate that.”

All in all, some very interesting colour about the market.

Related links:
LME warehouse recommends upping load-out rates
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Please wait 10 months for your aluminium. Thank you
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Welcome to ‘synthetic warehousing’
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China’s bonded-warehouse copper mystery
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