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The anomaly of higher prices AND higher stocks in copper

This was from SocGen last week, but still very relevant:

The rally in copper prices since mid-December 2012 has been accompanied by an increase in LME warehouse stocks of copper. LME stocks of copper have nearly doubled from a recent low of 210,000 tonnes to current levels of 401,675 tonnes. Copper prices in the face of mounting LME stockpiles of the metal have remained resilient and continue to hold comfortably above $8,000/t.

Are there any other factors to consider?

If seasonal factors are not to blame for the rising trend of LME stocks are there any other factors to consider? If we examine trends in exchange stocks (LME+Comex+SHFE) and copper prices then there have been periods as shown in the chart, where prices have risen at times of rising stocks. Most recently, this has occurred in late 2008/early 2009 and then in 2H 2009. Other factors to consider include:

Copper moving into LME warehouses on financing deals. The copper forward curve has moved from backwardation into contango perhaps facilitating warehouse financing deals akin to what we have seen in the aluminium and zinc markets. This metal is therefore unavailable to the market.

Metal has accumulated in warehouse locations such as Antwerp and Johor in the knowledge that it would be slow to be delivered out again bearing in mind the lengthy queues at most locations.

Even though metal has been delivered into LME warehouses again it may not necessarily be available to the market. Metal could be tightly held and warrants not easy to get hold of.

Finally, in view of the fact that JP Morgan’s physical copper ETF has been approved and others are planned (Blackrock’s physical ETF is scheduled to get a decision from the US SEC on Feb 22), is metal being stored in readiness for their launch?

— Izzy