The bears on global growth have pointed to the commodity rout in May as a sign of things to come. The argument goes like this: the prices of commodities have fallen, therefore demand must be waning and a global economic apocalypse is lurking around the corner.
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Copper Tubing
Not only is this logic flawed, it is inconsistent with the fundamental data. Certainly there are times in markets that price can influence fundamentals, the proverbial "tail wagging the dog," but that is not the reality in the copper market.
Investors have bestowed the "Dr." prefix on copper for its ability to forecast global economic growth. So what is the good Doctor saying now? It's saying the bears have it backwards.
We talk a lot about contango and backwardation on Fast Money, and a certain producer (who shall remain nameless) seems to have an unnatural obsession with showing the "tango" footage every time someone mentions contango. Despite the hijinx, these terms pack a powerful punch, especially backwardation.
Backwardation is when the front month futures contract trades at a higher price than the futures contract with delivery dates several months and years into the future. The implication is that market participants are willing to pay a higher price to get the commodity today rather than wait for the lower prices in a few months.
Why would anyone do this? Because they need the commodity today, not in 6 months. Put another way, backwardation indicates strong demand for the commodity.
Now back to the copper market, where demand for copper in China is very strong and has pushed the Shanghai copper futures market into backwardation.
What's even more interesting is that over the last few days Chinese buyers of copper have become even more aggressive. Other than Shanghai, Chinese copper buyers use the London Metal Exchange to purchase the red metal; this copper is shipped to China for either warehousing or end consumption.
Since February, the premium paid for Shanghai copper over LME copper has remained relatively low, as buyers were willing to wait to receive their copper until — literally — their ship comes in. However, in the last two days, buyers have bid up the price of copper in Shanghai well above the price on the LME.
Once again the inference from this price action is that immediate demand for copper in China is increasing. If indeed copper is to live up to its Doctor prefix ,then this would suggest the Chinese economy is about to re-accelerate. For our part we have added a full position in Freeport McMoRan as a way to play the rebound in copper prices. Additionally, most of the copper miners should get a boost from this increased demand and potential price appreciation. An easy way to get exposure to the copper miners is to buy an ETF; our favorite is COPX .
*Brian Kelly is founder of Brian Kelly Capital.
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