Sellside Continues to Shill for Copper Bulls

It would appear the manipulation in the copper pits knows no bounds. Homebuilding activity in the U.S. is all but dead, and automakers are on life support. Even Japanese homebuilders are going belly up, but the the SellSide keeps spinning a story:

Copper's 14 percent slump from a record on July 2 may be nearing a bottom as metal consumers pay a bigger premium for immediate delivery than for three months from now, indicating supplies have tightened....``The widening spreads are a real sign that supplies have tightened,'' said Donald Selkin, the chief market strategist at National Securities Corp. in New York. ``Users are having to pay up to get the product they need. It's a sign that the collapse in copper may be over.''

The copper-price gains will be ``aggressive'' in the next two years as supplies are limited and demand remains strong in China, Citigroup Inc. said last week. Miners will continue to face ``serious challenges on the supply side,'' BHP Billiton Ltd., the world's biggest mining company, said on Aug. 18. Bloomberg

How often can the copper bulls play the China card? If I were them I would be worried about a post-Olympic hangover, but they continue to make their case, conveniently ignoring the collapse in other base metals like lead, nickel and zinc. Copper rose merely 600% this cycle, outpacing the record 225% gain in put in before the Civil War in 1860's.

But some people are quibbling over the Chinese angle, and are expecting Doctor Copper to eventually crap out.

Chinese demand has boomed because its export machine has displaced the fabrication of metals in the first world. The fact of the matter is that global economic growth in this cycle has been decidedly sub-par.

So what resulted in this boom like no other boom in metals prices? First, it was the derivative tsunami driven by hedge funds.

In addition, it was an unprecedented manipulation.

There is a book out there on the history of copper. The title of the book is “Corner”. That has been what base metals have always been about. Except in this cycle it has been worse.

Will copper follow the other base metals down the toilet?:

The price of zinc and nickel have fallen a Fibonacci .618. That’s not a .618 fall from the prior cycle low; that’s a .618 fall from the distance between the peak price and zero. A veteran technician used to say to me, when a price falls off a peak by a Fibonacci .618 of the move off the prior cycle low, the market is finished. Lead, zinc and nickel are finished.

It is not surprise that BHP Billiton Ltd is spinning a constructive argument for copper, but the SellSide has clients it needs to help liquidate long positions, and god forbid their prop desks are long too. It smells like the oil market on June 6th when Morgan Stanley and, later that week, Goldman published headline grabbing price targets that squeezed the shorts in crude and gave the longs an immaculate exit.

Does this sound fishy? 

Despite horrible demand, one player owns 90% of the LME warrants and has LME copper in backwardation. Copper is leaving the Shanghai exchange warehouses and now Shanghai copper is in a big backwardation. The next thing we will see is more copper flowing into China to show the world how great Chinese demand is, even if Xiangxi is cutting production at its fabrication plants. Reports of these shenanigans are proliferating. It will be interesting to see if anyone believes the ruse this time round in this economic environment.

The copper producers keep telling the world about booming demand for their product, even though its principle use in residential construction and autos is cratering around the world. Their shills in the investment banks then go out and promote this propaganda.

But what is, in fact, happening? Demand is so bad that these miners can’t sell their copper. Some of their marketing people admit it. In some cases they concede the only buyers of their spot material are hedge funds/merchants.

Certainly North American and European demand is collapsing. And the Chinese just released statistics that would make a sane man question the stockpiles after reconciling the numbers. The recent capital investments the Chinese have made is not bullish either, longer term, given the supply implications the increase in capacity brings.

A respected trade publication has been chronicling the shifting of copper from LME warehouses to Shanghai, in an effort to put a hurt on traders who have put on contrary positions.

They might succeed in briefly pushing prices higher, but that could be it, as the game ends badly:

The odds are the base metals are at or approaching record surpluses. Because of the long lags involving in demand destruction and supply encouragement greater surpluses are baked in the cake even if the global economy was to grow at or above trend. But the fact of the matter is that the economy may grow below trend for the remainder of this year and next year.

Micro fundamentals and the macro cycle will eventually completely break theses prices and bring mean reversion and worse. That will be bad enough. But when the price collapses finally occur, history tells us the manipulations will surface. They have been on a greater scale this time around. When they become apparent wrong doing will be recognized and legal action should follow.

We are dealing here with the likes of the Hunts and the Hamanakas and the Enrons and the World Coms and the Adelphis. The investor revulsion that will be created by the collapse in prices will be amplified by the disrepute that will come back to these markets which have been known forever as a cesspool of “corners”.

Global Growth? It is just a memory.

Copper has pulled back in recent weeks, but the SellSide is arguing for a ramp, right here, right now. But Doctor Copper cannot decouple forever....and it might get as ugly as the cotton market, eventually.

Copper earned its useful nickname “Dr. Copper” over the years due to its ability to forecast the state of the economy and particularly the ebb and flow of the equity markets.

Copper Users Must `Pay Up’ as Market Bottoms: Chart of the Day
Bloomberg

Cotton spike puzzles traders
WSJ

Bullish? Here you go…

Commodities Hint of Bottom on Mine Closings, Supplies
Bloomberg

Bold Highlights
Frank Veneroso-Manipulation Floundering
August 19, 2008
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The content contained represent the opinions of 1440 Wall Street. This commentary in no way constitutes a solicitation of business or investment advice. It is intended solely for the entertainment of the reader, and the author. No position

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