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Daily Intelligence Briefing

Wednesday, September 2, 2020

Identifying Change-Driven Investment Themes – Five sections, explained here.

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I. Today’s Thematic Investment Idea

A deep dive into a market driver with alpha generating potential.

Copper Climbs to New Highs With Supply Still Strained

Summary: Copper Prices hit a multi-year high this week on the back of breakout demand from China, partially related to a crunch in imports in the secondary market. Metals are now leading many broader economic indicators in the midst of the global recovery, and a lagging rebound of production on the supply-side could boost copper even higher in coming weeks. A continually weakening dollar, as well as popularity among fund managers are also bullish signals.

Related ETFs: iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC), Global X Copper Miners ETF (COPX)

Chinese Demand Driven Higher by Dramatic Drop in Scrap

Copper cleared the pivotal US$3 per lb. level on Monday, shooting up as high as $3.065 ($6757 per tonne) on the Comex, as the recovery in the Chinese economy, the world’s top consumer of the metal, gains momentum.

Reuters reports that funds were net long of the CME contract to the tune of 60,974 contracts in the week to Aug. 18, according to the latest Commitments of Traders Report from the U.S. Commodity Futures Trading Commission (CFTC).

China’s refined copper imports hit 554,979 tonnes in July, spiking 89.9% YoY and 14.2% month on month, data released by the General Administration of Customs on Aug. 31 showed.

On the Shanghai Futures Exchange, the bellwether metal racked up its fifth straight month of gains in August, which is the longest winning streak since 2009. The Autumn months are usually the country’s slack buying season for copper, but the current momentum is likely to keep activity from slowing at the typical rates.

In light of increasing demand, the lack of available scrap in the country is becoming a serious issue.  Chinese solid waste laws dampened copper scrap importers interests, causing worries about future copper scrap supply, China Construction Bank said in its August copper report, noting that diminishing use of copper scrap could hike copper cathode demand. Scrap imports were down 50% in the first half of 2020.

The downturn accelerated in July as the country imported just 75,113 tonnes of copper scrap, down 92% YoY, per Platts data.

A constrained secondary market for copper while China’s overall economic recovery that is steaming along should push demand for refined products even higher. China’s Caixin/Markit Manufacturing Purchasing Managers’ Index (PMI) rose to 53.1 last month from July’s 52.8, marking the sector’s fourth consecutive month of growth and the biggest rate of expansion since January 2011.

On a broad basis, metals demand is outperforming broader economic indicators. Roskill foresees that copper consumption may fall just 3%-4% on the year this year versus an overall decline of 4.6% in global GDP.

Supply Concerns Abound in Stockpiles and South America reports that total visible stocks of copper globally, which include those on exchanges and bonded warehouses in China fell by 40% from March to end-July to below 600,000 tonnes. Inventories in LME warehouses are at 13-year lows.

Reuters notes that cancelled warrants – metal earmarked for delivery and no longer available to the market – at more than 50% of the total is also compounding worries about supply on the LME market.


Back in mid- July, we noted the possibility of future shortages resulting from a dearth of investments in new mines. The pandemic’s rapid spread across Latin America and worker strikes had already led to supply disruptions in key producing nations like Chile and Peru, the top 2 copper mining nations in the world, cutting down on production numbers for the year. 

Chile’s copper output fell 4.6% YoY in July, the second drop since the outbreak of the coronavirus pandemic, according to the country’s national statistics agency.

Bloomberg in July that Chilean Miner Codelco has largely given up on project development for the time being to focus on running existing mines with reduced staff. The state-owned firm risks an output decline of 600,000 tons, per CRU estimates, if they cannot upgrade their assets in a timely fashion.

While Codelco is now in the process of picking up where they left off, more Chilean miners could face yet another roadblock: a lack of water. MRP has long highlighted the issues lithium miners in the Chilean deserts face from lack of water, but that same issue may now be creeping up on the copper mines as well.

At the end of July, Chile’s Superintendency of Environment (SMA) informed the Australia-based BHP Group that it suspects the mining firm has been utilizing more water than it is permitted to use for almost 15 years at its Escondida mine. Chilean regulators say they have observed “a serious decline in the water table” near the Escondida mining site – a major copper mining region. Lack of access to water reserves would force many mines to resort to desalinated sea water, increasing their cost structure and constricting their ability to expand operations.

In August, Peru reported that production of the red metal plunged 20.4% in the first half of 2020 versus the same period in 2019. Though production is rising back to normal levels, output still fell 2.2% in July YoY.

Dollar Breakdown Boosts Commodities Outlook

Commodities as a whole, which are largely priced in Dollars, look poised to further benefit from the greenback’s slide, one which just saw the Dollar hit a 28-month low.

A weaker dollar means that buyers using other currencies enjoy stronger buying power because it now requires less of their currencies to purchase each dollar worth of a commodity.

Hedge fund bets against the dollar in futures markets are at their highest level in about a decade, according to data from the CFTC, while 36% of fund managers in a recent Bank of America Global Research survey named shorting the dollar as their top currency trade for the second half of the year.


In light of these developments, we are re-affirming our LONG Copper & Copper Miners theme, originally initiated on July 17, 2020.

The Global X Copper Miners ETF (COPX) invests in a diversified basket of about 30 copper miners. Meanwhile, the iPath Series B Bloomberg Copper Subindex Total Return ETN (JJC) offers exposure to fluctuations in the price of the physical commodity by investing in copper futures contracts.


Since we launched the theme, COPX and JJC have returned +15% and +4%, respectively. That compares to an S&P 500 return of +10% over the same period.


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