The Doctor Is In?

Inventories on exchanges have fallen from ~550kt in Apr-20 to ~325kt now. However, we believe that China’s SRB and individual provinces engaged in stockpiling activity mid-year. This can be seen by apparent consumption which is +16% YTD in China, bottom up activity metrics elsewhere suggest real underlying demand would be ~5%.

This has exacerbated the metals deficit in the short-term on top of the longer-term picture which is, however it might work out, one where risks are entirely on the supply side.

Given this material disruption of material scale, the other component left to it is what’s supposed to be in demand. Again, mostly China. In these figures cited above there’s better than cautious optimism as to how the Chinese, as well as others around the rest of the Emerging Market world, are going to deal with the aftermath of the huge global recession of 2020. It is, of course, expected that policies will be highly “accommodative” for a very long time, boosting economic output on the way back up.

With that plus expected recovery from the trough, even an impartial one, and now vaccines plotting a realistic end to the pandemic, there’s quite a bit of optimism about the intermediate-term, too, on the demand side thus creating even more of a projected fundamental imbalance.

Short and long-run supply problems mixing with vaccine-aphoria and Dr. Copper’s sent flying upward (note: it’s not just copper where these same imbalances have and are showing up, as inventory hoarding has been spotted in other industrial metals, too, as well as supply disruptions which have been even more severe).

 

It’s not a “money printing” trend so much as, like oil, a negative story of economic activity held back by the repercussion of a deflationary posture. A good way to picture this, at least in the US, is using BLS data on the employment situation in the mining (and logging) industries (above). If there’s a commodity super-cycle forming here predicated on a price surge fed by too much Fed and feds, or even just a roaring global recovery China-style, then domestic producers sure aren’t ramping up their hiring (and short-run output) in direct anticipation of it.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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