Copper: Are These Two Firms Cornering The Market?

| May 1, 2013 | 0 Comments

copperLet’s pick up right where we left off on Monday…

Fears of a global economic growth slowdown have commodity investors thinking twice about buying hard assets.  Whether it’s the precious variety like gold and silver, or the industrial flavor like aluminum and zinc, metals have all taken dramatic price downturns in recent months.

But copper has been hit especially hard…

The red metal plunged from $3.75 a pound in early February, all the way down to a new 52-week low of $3.09 a few days ago… a whopping 17% drop. 

Why such an abrupt downturn?

As I reported Monday, extraordinarily high London Metal Exchange (LME) inventory levels have copper bears roaring.  Supplies of the red metal at LME monitored warehouses are just short of 600,000 tons- that’s near 10-year highs. 

In case you’re unaware, professional traders closely monitor LME warehouse supply.  The higher the supply, the more bearish it is for copper prices.

However, there may be more to LME copper inventory levels than meets the eye…

It turns out that only two commodity trading firms, Glencore International PLC and Trafigura Beheer BV are holding most of this supply.  In fact, Glencore’s New Orleans and Malaysia warehouses, along with Trafigura’s Netherlands warehouse, now hold over 70% of total LME copper inventories.

According to a recent Wall Street Journal article, both trading houses are offering at least $100 a ton above the current market price to secure copper in their warehouses. 

Why would these two firms do such a thing?

It’s simple.  They’re looking to control world copper supplies.  One could go as far as to say they’re trying to corner the copper market.  

But in fact, what they’re doing is known in commodity circles as a “warehouse play”…

The idea is fairly simple… 

By securing the majority of global supply, end users have little choice but to purchase from these two firms.  And when they do buy, the firms charge them hefty storage and delivery fees.  For example, fees to get copper delivered in the US are currently over $130 a ton.   And remember, that’s on top of the price of the actual metal!

The more supplies that Glencore and Trafigura secure, the higher those fees will likely go, and the more money they’ll make when they finally deliver the copper.

I have no doubt that industrial copper users are getting mighty annoyed at the situation.  Not only do they have to pay the high fees to get the copper they need, but the wait times to have the copper delivered is currently pushing beyond four months.

And that creates another issue…

Global copper demand is expected to pick up in coming months as China restocks their inventories.  As you may know, China accounts for 40% of global copper demand.

But with so much of global supply controlled by Glencore and Trafigura, we may very well see an artificial shortage in the copper market.

And you know what that means…

The price of copper could explode higher in coming months!

You can bet your bottom dollar I’m keeping a close eye on this situation.  Be sure to stay tuned to Commodity Trading Research for profit opportunities on this developing story.

Until Next Time,

Justin Bennett

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Category: Copper, Industrial Metals

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.