Antofagasta mine
Chile's Los Pelambres copper mine

Even the horses seemed to have read the script this year at Cesco week.

A horse race at the 2,000-strong gala dinner for the great and good of the copper industry in which each runner was named for one of the world’s largest copper mines was won by “Esperanza” (in turquoise). The mine is one of a clutch of Chilean production sites whose output growth this year contributed to a decidedly bearish tone at the gathering.

The miners, traders and hedge funds I spoke to were almost unanimous in expecting the copper market to be in surplus this year, next year and probably the year after.

But there the agreement stopped, with some expecting prices to be forced down to $6,000 a tonne (vs current prices of $7,500 and a high of $10,190 in 2011) while others believe that prices will stay at today’s levels.

Here is what I took away from the week:

● Both Chinese demand and the Chinese stocking cycle are now positive for the market. Chinese end demand is recovering from a terrible 2012 in which copper demand saw zero growth or perhaps even contraction, although it is not growing at the dramatic pace it saw in the last decade. Copper consumption for the power grid is going strong; some other areas less so.

At the same time, last year’s destocking by consumers appears to have ended. And, as prices have fallen in the past month or so, bonded stocks in Shanghai are being drawn down. CRU, the consultancy, estimates the stocks stand at 700,000-720,000 tonnes, from a peak of more than 800,000. Some traders say the draw could be as much as 150,000. Chinese smelters have stopped exporting metal wherever possible – a flow that traders estimate will account for some 40,000 tonnes a month this year.

Premiums for copper in bond and CIF have leapt to about $100-$110 a tonne, the highest since early 2012, with CIF Shanghai heard to have traded as high as $120. Combine the improvement in China with the near-record bearish positioning of hedge funds in the market, and most people in Santiago this week were expecting a near-term short-covering rally.

● But where were the Chinese? There was a noticeable dearth of Chinese delegates at Cesco week this year. In part that is likely to be because of the creation of new Asian copper conferences – “Asia Cesco week” in Shanghai in November and an Asian LME week in Hong Kong in June. It was also suggested that some Chinese traders had struggled to get visas. But without doubt the lack of Chinese participants added to the sense that they were unlikely to chase the market higher. And while most funds and traders are expecting a short-covering bounce, they are all planning to use it as an opportunity to get short. Targets on the downside are in the $6,200-$6,800 range by the end of the year.

● Copper joins in the warehouse games. The rise in LME stocks to a 10-year high has been a major driver of the bearish thesis. This is largely reflective of the poor demand in China and Europe at the end of last year, as well as the improvement in supply. But it is also a result of the fact that warehouse companies – particularly Pacorini, owned by Glencore – have been offering incentives of more than $100 to deliver copper to their warehouses. In this sense, copper has become caught up in the game of stock accumulation behind long queues in the same way as aluminium and zinc have.

The response from the copper industry this week was less than delighted: Thomas Keller, chief executive of Codelco, the world’s largest copper producer, told me the situation was “prehistoric”. “It distorts the market. If the LME can do something about it, it would be welcome,” he said. Several of the world’s largest copper consumers were also vocally unhappy.

The warehousing incentives make the LME stocks more difficult to interpret, since they are likely to have drawn out inventory from other less visible locations. “No consumer has any stocks of anything. All the stocks are visible,” said one large trader.

● Woes of the mining industry part 1: what is the marginal cost? If there was one constant of Cesco week this year it was listening to mining executives bemoaning their lot. Costs – both operating and capex – are still rising rapidly because of falling grades, higher energy, water and labour costs, and strong producer currencies. CRU estimates that copper mining costs in Chile have increased 60 per cent since 2007, compared with 30 per cent globally. Nowhere is the trend clearer than Codelco, which saw a 57 per cent increase in cash costs between 2010 and 2012.

Nonetheless, those costs remain low relative to current prices, with Codelco’s overall cash costs at $1.635 a pound ($3,604 a tonne) – leading some investors to argue that prices have much further to fall. But references to cash costs are increasingly falling out of favour among mining executives, as they recognise that there is a significant additional cost involved in simply keeping production constant from one year to the next. Several miners’ internal models now predict “long-term” prices of more than $3 a pound ($6,600 a tonne); Wood Mackenzie sees long-term prices at $3.50 ($7,716 a tonne).

● Woes of the mining industry part 2: will no one rid me of this troublesome asset? Pinto Valley (BHP Billiton), Northparkes (Rio Tinto), Frieda River (Xstrata) . . . for an industry that professes itself to be bullish copper, the miners are certainly trying to sell a lot of assets. One trader described the sell-off of assets (which spreads well beyond copper to coal, aluminium, nickel and other commodities) among the major miners as a “firesale”. But many suspect that, as in previous cycles, the miners are selling close to the bottom of the market. As one senior trader said: “In the medium term, they are so wrong.”

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