When prices for the red metal plummeted Wednesday morning the mainstream assumed Dr. Copper was simply waking up to the reality of slowing growth in China. Since China consumes 40% of the world's copper, a slower China had put copper into oversupply.
Well, it seems China was to blame – but not for that reason.
Play detective for a moment.
Wednesday's sell-off started at 1am UK time, late evening in North America – after almost all western metal traders had turned off for the night. In an hour, copper on the London Metal Exchange fell more than $400 to less than $5,389 per tonne.
When the price fell below the key support level of US$5,500 per tonne a wave of stop-loss sell orders were unleashed around the world, compounding the effect.
And this all happened in a global market made anxious by oil's collapse and during the first quarter, when copper demand in China is weak because consumers and traders don't want to hold big piles of copper over the looming two-week Chinese New Year holiday. Those factors made a copper decline 'make sense', further fueling the slide.
And who would have benefitted? Hedge funds holding cheap puts, which are options giving the buyer the right to sell copper at a set price. Before copper's crash these options were out of the money. With copper significantly lower the options turned profitable – and the same Chinese hedge funds that had pushed the price down made a quick killing.
It would not be the first time Chinese funds staged a Bear Raid on copper. Last March they pulled a similar move, selling massive quantities of copper over three days to push the price down. The episode rattled traders but the price returned fairly quickly.
It makes sense. With China so dominant in the copper market, they are better positioned to pull off such manipulations. They know when physical buying is strong and what price would make China's Strategic Reserves Board start buying. And there are a large enough force to actually change prices when to their benefit.
As the Financial Times put it: "Dealing during illiquid hours, their aggressive tactics can have speedy ramifications given the increasing presence of high-frequency traders and black-box funds that sell or buy based on preset instructions."
Copper starting correcting the crash quickly, rising to $5,625 by the end of the day. That's still more than 12% down since the start of the year, but commodities as a grouped have been hammered.
Looking ahead, despite bearish predictions in the fall the copper market now looks pretty tight, after several disruptions shifted the market. Rio Tinto lowered forecasts for its Kennecott mine by 10,000 tonnes, BHP shaved 150,000 tonnes off its Escondida outlook, and Glencore reduced guidance from Minera Alumbrera by 50,000 tonnes, among others.
As a result, just three months ago Macquarie predicted a 400,000 to 500,000 tonne copper surplus in 2015. Now the leading commodities forecaster sees balance or even a deficit.
Copper won't be the most exciting metal in 2015, but it will do just fine. Unless these Chinese traders have another big pile of even cheaper puts they need to ditch.
Resource Maven finds and explains the news that matters every day in the world of resource exploration and development.
Or follow Maven: Facebook (www.facebook.com/resourcemaven)
To learn how to turn resource knowledge into investment success: subscribe to Resource Maven: The Turning Point.
EDITORIAL POLICY AND COPYRIGHT: Companies are selected based solely on merit; fees are not paid. This document is protected by copyright laws and may not be reproduced in any form for other than personal use without prior written consent from the publisher.
DISCLAIMER: The information in this publication is not intended to be, nor shall constitute, an offer to sell or solicit any offer to buy any security. The information presented on this website is subject to change without notice, and neither Resource Maven (Maven) nor its affiliates assume any responsibility to update this information. Maven is not registered as a securities broker-dealer or an investment adviser in any jurisdiction. Additionally, it is not intended to be a complete description of the securities, markets, or developments referred to in the material. Maven cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. Additionally, Maven in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned. Furthermore, Maven accepts no liability whatsoever for any direct or consequential loss arising from any use of our product, website, or other content. The reader bears responsibility for his/her own investment research and decisions and should seek the advice of a qualified investment advisor and investigate and fully understand any and all risks before investing. Information and statistical data contained in this website were obtained or derived from sources believed to be reliable. However, Maven does not represent that any such information, opinion or statistical data is accurate or complete and should not be relied upon as such. This publication may provide addresses of, or contain hyperlinks to, Internet websites. Maven has not reviewed the Internet website of any third party and takes no responsibility for the contents thereof. Each such address or hyperlink is provided solely for the convenience and information of this website's users, and the content of linked third-party websites is not in any way incorporated into this website. Those who choose to access such third-party websites or follow such hyperlinks do so at their own risk. The publisher, owner, writer or their affiliates may own securities of or may have participated in the financings of some or all of the companies mentioned in this publication
In her letter, Resource Maven explains what she is buying and selling, and why. Maven has bought into several of the markets best - performing stocks well ahead of the curve. She regularly identifies exciting new exploration opportunities and manages the inherent risk by selling some into speculative gains. And the mine builder and operator stocks that form the basis of the portfolio give strong, ongoing leverage to the rising prices of gold and silver. She has your precious metal bases covered.
Great job Gwen... you are becoming the most credible in the world at this... Bravo
Thank you so much for this excellent Maven letter. Your market analysis and logic is again exceptional. Your insights, knowledge and feel have given me a wonderful couple of hours. I am now planning my activity. I look forward to seeing you tonight on the Virtual Metals forum, I am pleased that you start first as I am a morning not a night person.
I hope you and your family stay well.