Why the Dip in LME Copper Inventories Benefits Freeport Investors



LME copper stocks

Previously, we saw that copper stocks in China have increased sharply this year. In this part, we will analyze the latest trends in London Metal Exchange (or LME) copper stocks. Possessing real as well as financial value, copper is among the most widely traded metals on the LME. Investors also trade in copper futures to cash in on the volatility in copper prices.

Analysts believe a significant amount of copper is tied up in financing deals. In a typical financing deal, importers in China open a letter of credit (or LC) with foreign banks by paying a portion of the total import costs. Chinese importers then sell the copper and receive the cash. The typical repayment time for LCs is three to six months. However, some alleged fraud was uncovered in these deals last year, which negatively impacted the financial demand of copper.

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Copper stocks rise

The above chart shows the trends in copper inventories on the LME, which have almost doubled since the start of this year. The on-warrant copper inventory also increased by ~65% over this period.

However, the on-warrant copper inventory has come down in March. This implies that more metal is being booked for delivery from the warehouses. As discussed previously, investors should look at on-warrant inventory. The decrease in on-warrant copper inventory is positive for companies like Freeport-McMoRan (FCX), Southern Copper (SCCO), Teck Resources (TCK), and Barrick Gold (ABX). Barrick Gold currently forms 8.66% of the VanEck Vectors Gold Miners ETF (GDX).

Investors also need to watch the monthly copper production numbers, which can give crucial insights into the copper industry. We will discuss copper production numbers in detail next.


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