Copper DynamicsMURAT KONUKLAR

JUNE 2015

Do not believe the FACT Only the MOMENT ( not the TIME ) drives the MarketHistory might repeat itself (In FACT never repeats) but this time will not repeat for you

Do not take any chances ! This is not a GAMBLE and Hedge Funds do not have MERCY

LME COPPER 3M Prices are always indicative nothing moreNever Bet on the Recent Figures of Open Interest on the COMEX and LMEor SHFOE– It is a LIECopper Prices are MANIPULATIVE and the Market never cares about your expectations

Copper Demand has been shaped by the BANDITS via Expected Demand Forecasts

Do not think without any Business Plan Business Plan must depend on Rational Scenario PlanningRational Scenario Planning I: WORST SCENARIO | II: TOLERABLE SCENARIO | III: BEST SCENARIOWithout Active HEDGING, Always WORST SCENARIO wins

ALWAYS HAVE A CONTINGENCY TRADING PLAN IN LINE WITH YOUR RISK TOLERANCE FUNCTION

General Framework Information is entropic

It diffuses through markets

Not uniformly: waves and turbulence in the transmission

Second Law of Thermodynamics Information is energy

Law of One Price Depends upon perfect diffusion

Understanding the structure of the financial universe « Global supply and demand for money », this is not the Cause, it is just your

Belief !!!

The Causality is driven by Planners ( Who are they? They are Invisibles. )

Superior Information

Know the impact of events before other investors

Disappears when spotted by investors

Hard to capture, often very information intensive

Technical Strategies

To discover Mispricing and Risk Premia using technical analysis of price patterns

Trend following Statistical arbitrage

Cyclical shocks in Copper Price Dynamics are transitory.

There exists be a substantial speculative component in the current level of prices.

Price Dynamics is designed as a bubble induced extrpolator-attractor features

Ln(Price) = Trend + Cycles + Autoregression + Interventions

xt and yt are short and long cycles and zt is an intervention

Model these trends as stochastic

t is the drift, which may vary over time. t and t are disturbances.

If t = 0 for all t the trend is deterministic.

If t = t = 0 for all t (this is true for sugar), the trend is linear

Prices are driven by hedge funds and other speculators characterized as having extrapolative expectations

Copper: An Internationally traded commodity

Price Characteristics :

I. Volatile

II. Cyclical

III. Determined by the major metals exchanges

New York Mercantile Exchange (COMEX)

London Metals Exchange (LME)

Shanghai Futures Exchange (SHFE0)

1t t t t p t tp x y p z 1

1

t t t t

t t t

Theoretical Approach : Self Illusionary Aspects. That Counts for Nothing More

BackgroundSince production costs are low relative to capital costs, metals prices must fall a long way before it becomes economic for a mine to cease production.

Grubbing up trees is costly, and farmers tend to devote time and inputs to other activities rather than do this. In both cases, excess supply can overhang the market for a number of years until demand catches up.

Demand ? Which Demand?

i. Manipulated Demandii. Excessive Demandiii. Expected Demandiv. Realized Demand

Assuming is dangerous when the decision maker have limited capital to spend

Never assume when the darkness surrounds without any exit lightThe approaching light might be a TRAIN

BELIEF or STATE OF UNCONSCIOUSNESS

The structure of futures prices provides an indicator of market expectations of future cash prices

Copper, grade A cathode, LME spot price, CIF European ports, US$ per metric ton

Commodity.Description

1980 January – 2015 May

Frequency : Monthly

Time Span : 1980 - 2015

Copper, Grade A cathode, LME spot price, CIF European ports, US$ per metric ton

Copper, grade A cathode, LME spot price, CIF European ports, US$ per metric ton

Similarities ?Be careful...All price dynamics indicates a FACT !!!

« A FACT of Bubble »

Rationally, a clear and present danger

Simple and PlainThis is MISPRICING

A state of investment phase where the Investor believes that the market will follow his/her imaginations

I. 2008 Financial Crisis

II. China Stimulus

III. Speculative Motions

HEDGE FUNDS

IV. Supply Disruptions

January 2015

March 2015

I. 2008 Financial CrisisCopper reaches all time high before 2008 Financial Crisis

2011

II. 2011 China StimulusCopper rebounds on strong China demand as a result of the country’s post financial crisis stimulus

Copper, grade A cathode, LME spot price, CIF European ports, US$ per metric ton

A B

C

D

Frequency : Monthly

Time Span : Dec 2007 - May 2015

III.Speculative MotionsHedge Funds and Chinese speculative funds partly responsible for driving

copper down to 5 and a half year low amid weak Chinese demandIV. Supply Disruptions

Flash floods devastates the copper producing Atacama Region in the North Chile, with the worst rains seen in

80 years

I. 2008 Financial Crisis

II. China Stimulus

III. Speculative Motions

HEDGE FUNDS

IV. Supply Disruptions

January 2015

March 2015

AMax Date 2008M4 AprilMax Level USD 8714.18Min Date 2008M12 DecemberMin Level USD 3105.10Realization DownPercentage – 64.3 %

2011

Copper, grade A cathode, LME spot price, CIF European ports, US$ per metric ton

A B

C

D

Frequency : MonthlyTime Span : Dec 2007 - May 2015

BMin Date 2008M12 DecemberMin Level USD 3105.10Max Date 2011M2 FebruaryMax Level USD 9880.94Realization UpPercentage + 218.22 %

CMax Date 2011M2 FebruaryMax Level USD 9880.94Min Date 2011M10 OctoberMin Level USD 7394.19Realization DownPercentage -25.17 %

DMax Date 2014M7 July Max Level USD 7113.38Min Date 2015M2 FebruaryMin Level USD 5729.28Realization DownPercentage -19.44 %

Short Coveringby the speculative investment dynamics

Copper, grade A cathode, LME spot price, CIF European ports,

US$ per metric tonFrequency : MonthlyTime Span : June 2010 - May 2015

Downward TrendCopper prices are trending lower. Having moved below numerous lows established between 2011 and 2014, the chance that prices fall back to test support in the $5,300-$5,500 area has already happened.

The fundamentals are mildly bearish. Much will ultimately depend on whether China manages to keep growth above seven percent, whether the ECB can reignite growth and whether the US can avoid being dragged down by the weakness elsewhere.

On the other hand, China’s structural supply deficit will mean it becomes a scale-down buyer, supporting the price.

Copper prices have been rallying since Februrary and in the short term, investors are placing order markets now for known demand.

Recommendation:

Do not buy long term forward, as copper is in a bearish market and we expect prices to lose steam soon and come back to lower levels

Short Term

Upward Trend in USD

Copper is about China.

The news stories may talk about various stimulus packages, but Dr. Copper is telling a relatively consistent story about reduced construction - it is another deflationary puzzle piece. 

Investment Window – Illusionary Effects DecisiveFactor

Uncertainty in theInvestment Horizon

Discrepancy in the Market

Vulnerability

The market's next Fed fear: The Exit Strategy

Asymmetric External Shocks

FED EXIT POLICYEven if the U.S. central bank didn't exactly start flashing the lights to indicate that the easy-money party is over, it at the very least indicated that it won't go on forever.

Cooling industrial growth in China, the world’s biggest consumer, is spurring concern that demand will ebb. A jump in stockpiles tracked by the London Metal Exchange has also driven prices lower

FACT

RISK PREMIUM

With weak growth in China

Emerging markets slowing

Europe coupling with recession, and

Declining oil pricesConsiderable time

The Relative Value of USD

Data Dependent Market Followers

It’s a well-supplied picture. Combine all these things and it is how bearish the outlook is for copper

Change : Investment

Flows from US to Periphery

Three Sisters

FED Commodity prices have been compressed in anticipation of this incremental move toward a rate hike

The Fed’s communiqué to mean interest rates would remain pinned near zero for longer, making it more likely that metal demand would improve as factories take advantage of lower borrowing costs

The U.S. is second behind top copper consumer China in the global ranks of metal demand

The USA high government debt levels and long term unresolved fiscal and economic policy issues in the USA and Europe, low growth rates in the world’s major economies, heightened concerns regarding a slowing China economy and real estate driven asset and debt bubble, and continuing geopolitical uncertainty and risk all weigh on global markets and copper prices

CHINA In order to support copper is the idea that China will provide further stimulus measures to boost growth and demand if data continues to show economic deterioration

Additional measures are likely to be necessary because the sharp decline in producer prices in May points to weak domestic demand

If China were to step in with a game-changing stimulus package, the outlook might change.

While the Chinese Power Grid and related infrastructure projects made in early January had limited impact on the market, such steps will clearly provide some support to demand

MARKETNear-term trends will purely depend on the US dollar’s dynamics

The economic slowdown in China and Europe and a larger supply surplus this year are the main driving forces behind lower copper prices

Given recent currency turmoil and the rallying US dollar, growth in other emerging markets may slip, all of which suggests there is little to be bullish about

Weak Price Dynamics

TOLERABLE SCENARIO

Range -trading to continue @ $ 4,500 - MAX $ 7,000 this year, with the upper prices levels likely to be seen during short-covering rallies.

In the second half in 2015 we would look for a touch point @ range of $ 5,000 - $ 5,500 range.

A Bargain Range would be the range @ $ 4,500 – $ 5000