METALS INSIDER: Spreads pinpoint copper's capitulation 23 October 2008 -- Andy Home is a Reuters columnist. The opinions expressed are his own -- By Andy Home LONDON, Oct 23 (Reuters) - The LME three-month copper price has nearly halved in value since the start of September. Valued at $7,510 per tonne on Aug 29, it closed Tuesday valued at $4,155, its lowest close since November 2005. The copper contract has lived up to its "bellwether" reputation, encapsulating first the asset liquidation rout of September and now the icy blast of full-blown recession. Even seasoned copper hands have been rocked by the scale of the collapse. "Shocking" was the word used by Richard Adkerson, chief executive of U.S. producer Freeport McMoRan. Only over the last couple of days, though, has the slump in three-month prices been mirrored by a collapse of the nearby spread structure, a development that may well mark the final capitulation phase for the red metal. BACK TO CONTANGO ? The benchmark cash-to-three-month period has closed the last two days valued at $1.00 backwardation and $6.50 backwardation respectively. As recently as a couple of weeks ago it was valued at over $100 backwardation. Within the period only the cash-to-November spread is still in significant backwardation at all. November-to-December and December-to-January are now in contango, a word that had almost fallen out of use in the LME copper market. The last time this happened was back in early January. It remains to be seen whether this super-fast dissipation of nearby tightness has marked the exit of the last bull in town, the long position holder that has dominated the cash date for many months. The LME's compliance reports are backdated two days for confidentiality reasons. The most recent report out yesterday, detailing dominant positions at the close of Monday, showed the dominant long still sitting in the 90 percent plus bracket of cash positions relative to available (non-cancelled) LME stocks. Only the next couple of reports, due out later today and tomorrow, will tell whether the long position holder has loosened its grip on the cash date. What has changed dramatically, though, is the short-term outlook for LME copper stocks. Monday's big 6,850 tonnes of drawdown, largely from South Korean locations, almost depleted the cancelled tonnage pipeline. Metal in the LME warehouse system earmarked for departure has shrunk to just 3,450 tonnes. That's the lowest amount of cancelled tonnage in the system since the middle of December 2007, a period usually characterised by very weak spot demand ahead of the Christmas/Western New Year holidays. The ratio of cancelled tonnage to total registered tonnage is now a paltry 1.7 percent. A month ago it stood at 10.3 percent, a flashing red warning light for over-eager bears. LME stocks are still very low by any historical benchmark but the "normal" seasonal decline during September as consumers restock after the summer period has been conspicuous by its absence this year. LME inventory has risen by a net 35,525 tonnes since the start of September. Low cancelled tonnage signals that the rate of daily departure is now set to drop several gears, leaving the headline figure even more sensitive to the rate of inflow. Taken together, the depletion of cancelled tonnage and the collapse of the nearby spreads suggest that the warning light has been switched off for now at least. SURPLUS BUT HOW BIG ? The market is pricing in expectations that stocks will build, possibly significantly, over the coming period as an ever greater part of the global manufacturing base slips into recession. The refined copper market is already in small production-consumption surplus. It only remains to be seen how big that surplus will grow over the coming months. The International Copper Study Group's latest bulletin assesses the seasonally adjusted surplus at 166,000 tonnes in January-July 2008, compared with a surplus of 104,000 tonnes in the same period of last year. These are obviously backward-looking figures and it seems inconceivable that the demand situation hasn't deteriorated a lot further since July. Moreover, while last year's surplus largely disappeared into commercial stocks build in China, the same may not happen this time around. When copper first started sliding from its lofty heights above the $7,000 level in early September, Chinese buyers looked as if they were about to step up to the plate in a big way. Indeed, the country's net imports of refined metal (not including alloy) rose to a six-month high of 110,600 tonnes in September. However, Chinese buyers now seem to have backed off, presumably because they have been as shocked as everyone else by the scale of the price decline. Three days of limit down and a trading halt tomorrow on the Shanghai Futures Exchange have not helped arbitrageurs either. That's not to say that China Copper Inc won't be drawn back in force by what will look like bargain-basement copper prices but no buyer of whatever nationality will commit while there is the potential for lower prices still. That means that market surplus should start appearing more forcefully in LME warehouses in the coming period. That certainly is the implication of the collapse of nearby spreads.
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