Commodity wrap -Copper, silver, coffee, cocoa (09/01/20)

• Copper at new 2-year highs, 10% increase this year and more than 50% increase from  pandemic lows
• Very strong rebound in demand for copper in China. There is a chance for further expansion of industrial activity in this country
• Very low levels of copper inventories in the world. In China, a 40% decrease in the period March-July. Inventories levels in LME warehouses on 13-year lows.
• We can speak of "panic" buying of copper in China. Current stocks levels represent just 2 weeks of consumption taking into account current consumption rate.
• The small amount of metal in the market is also reflected by the higher spread between the contract price and the spot price, which is currently around $ 30 / ton. This is the highest level since March 2019.
• The current increases are very similar to what happened during the previous financial crisis (GFC). Therefore, theoretically, further growth can be expected by the end of this year
• Roskill, a company that analyzes the industrial market, including metals, indicates that despite the global decline in demand, the decline in supply was greater, which motivates prices to further increases

LME copper inventories have fallen to their lowest levels since 2005, while inventories on all major exchanges are over 30% below the 5-year average. Source: Bloomberg

The spread between the futures and spot price is currently $ 30, the highest since March 2019. Source: Bloomberg

Silver:

• Silver benefits from higher copper prices - greater industrial demand
• Additionally, silver is mined together with copper. Problems in the supply of copper, shown by approx. 80% of mining companies in the first half of the year, are also problems with the extraction of silver
• However, the seasonal peak could be a warning signal for silver. Nevertheless, the local low is expected to appear in the first half of September
• Silver performees slightly better than gold. It is closer to its recent local highs compared to gold.

The price of silver is approaching $ 30 an ounce. It is not overbought in terms of positioning, but the seasonality indicates declines. On the other hand, ETFs indicate the possibility of consolidation. Source: xStation5

Coffee:

• Coffee inventories levels broke below their 2 year lows and are at their lowest level in 2 decades
• Price broke above local highs in March and is at its highest since December 2019
• Brazilian coffee is likely to be made available for delivery under ICE contracts, which could lead to a significant rebound in inventory levels. Until now, the coffee for delivery at ICE came mainly from Central America. However, if Brazilian coffee is not accepted in terms of quality, it could mean a further price rally.
• Brazilian coffee has been available for delivery on ICE since 2013, but there has been little interest in it so far (coffee must meet certain conditions to be used as a supply of ICE contracts)
• Brazil has produced a record amount of coffee this year in the amount of 67.7 million bags. The amount of coffee that could meet ICE conditions is only 2.5 to 3 million bags.
• The Brazilian Real has rebounded recently but is still very weak on an annual basis against the US dollar.
• Positioning may suggest that coffee is overbought. Long and short positions at extreme levels.

Coffee inventories drop to their lowest levels in 2 decades. Will Brazilian coffee save inventories on exchanges? Source: Bloomberg

Positioning suggests that the coffee market is probably overbought. However, a lot will depend on the further behavior of inventories and the Brazilian real. Source: Bloomberg

Cocoa:

• ICCO is reducing its demand forecast. ICCO expects processing of 4.64 million tonnes in the 2019/2020 season. It is about 148 thousand tons lower compared to previous forecasts.
• ICCO expects that the supply will exceed the demand by 42 thousand tons. Previously, the organization expected 80 thousand tons of deficit.
• At the same time, in August, the monthly increase in prices was the highest since 2018.
• The weather outlook for 2020-2021 keeps prices at a high level
• Cocoa inventories levels are declining, although historically they are still quite high

Cocoa inventories level decline in line with seasonality, although this is obviously not the same scale as in the case of coffee inventories. Source: Blomberg

The cocoa price is at its highest level since March. Potentially, we are seeing a head and shoulder formation with a range around $ 2,950 / $ 3,000 per ton. Cocoa is not overbought in terms of speculation, while the seasonality indicates a consolidation. Source: xStation5