After having traded as high as $7,177 per metric ton in mid-October, the LME 3-mo. copper asking price traded below $6,600 per ton during the first week of December.
An influx of stocks into LME warehouses and concerns about Chinese demand growth were widely cited as the sources of the recent price drop. But the pattern of rapid restocking at LME warehouses when stocks approach certain levels has raised questions as to whether the exchanges are more reflective of physical market dynamics or investor speculation. Here’s the conspicuous trend in LME copper stocks so far this year:
The widening of copper scrap spreads would seem to support the argument that exchange prices are influenced more by speculative/automated trading than market fundamentals. As compared to metal prices at the exchanges, scrap tags have been more accurate indicators of physical market demand. According to AMM, the discount on No. 2 copper scrap delivered to refineries stood at around 42-43 cents per pound in early December. Compare that to June 2016, when the spread on No. 2 copper was around 17-19 cents. Looking into 2018, Goldman Sachs (New York) is forecasting an average copper price of $7,050 per metric, but what that price level could mean for scrap recyclers remains unclear.