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Chinese copper demand could catch short-sellers by surprise
August 5, 2013 / 3:23 PM / in 4 years

Chinese copper demand could catch short-sellers by surprise

* Copper slides as investors worry over weak China data

* Power grid spending drives underlying Chinese demand

* Speculators build up record H1 short position

By Eric Onstad

LONDON, Aug 5 (Reuters) - Gloom over weaker economic growth in China has led some investors to miss signs of robust underlying copper demand, which may wrong-foot those betting on a further slide in prices.

Benchmark prices in copper, viewed by many investors as a proxy for global economic health, hit the lowest levels in nearly three years at $6,602 a tonne in late June.

The price on the London Metal Exchange (LME) slid 21 percent from a peak this year in February, mainly due to worries about China, which accounts for 40 percent of copper demand. It has since rebounded modestly to trade just under $7,000 a tonne.

Despite China’s weak factory data and a credit crunch, spending on the power grid and other areas has meant copper consumption is fairly buoyant in the world’s biggest metals consuming nation.

China’s apparent copper demand, after adjusting for changes in stocks, surged over 20 percent in the second quarter, Barclays analyst Gayle Berry said.

“From a Chinese demand perspective, things are quite positive. Going into the third quarter. I think we’re going to get some strong numbers coming through for apparent consumption,” she said.

The latest U.S. data on Friday showed hedge funds and money managers nearly doubled their net shorts in copper futures and options in the week to July 30, the biggest increase in bearish bets since late February.

Wiktor Bielski, head of commodities research at VTB Capital in London, agrees. “I suspect that people have become too bearish because of this long dreary period when things have been drip, dripping weaker, and they’re missing that there’s been slow but steady change to a more positive outlook.”

Firm demand is translating into a steady decline in copper inventories, while logjams at warehouses could crimp availability if consumption picked up further.

Stocks at the Shanghai Futures Exchange have slid by a third since April, while LME stocks have declined 11 percent since late June.


Investors have been amassing record short positions in copper this year, analysts say, although the positions have fluctuated as some fund managers have locked in profits.

The LME does not provide a breakdown of short and long position holders like U.S. regulators do, but analysts say a surge of open interest and lower prices indicated a large short position built up in the first half.

“We are talking about some very, very large short positions. My guess is that we’ve had all-time high short positions built up in the first half of this year,” Bielski said.

He estimated combined positions equivalent to more than 4 million tonnes of copper worth $28 billion at current prices had built up on the LME and smaller U.S. Comex contract.

Some of those have been liquidated, but that still leaves a very heavy short position, Bielski added.

If Chinese copper demand gathers steam and surprises the market by its strength, that could spark strong short-covering.

“Open interest nevertheless remains elevated, suggesting that there is potential for a more sustained short-covering rally if a trigger, perhaps spread tightness, does emerge,” analyst Leon Westgate at Standard Bank said in a note.


Signs of tighter availability have been emerging from the forward curve on futures exchanges.

The Shanghai Futures Exchange is in backwardation, with nearby contracts at a premium to forward ones, indicating stronger demand for spot material. On the LME, copper briefly went into backwardation in early July for the first time in eight months.

Traders say many of the positions are concentrated in contracts for September and October expiry, when a potential squeeze could occur as investors seek to roll over positions.

The bears are counting on additional supply to pressure the market as new mines ramp up and existing operations boost output. Copper output jumped 28 percent at Escondida, the world’s biggest copper mine, in the 2013 fiscal year to end-June, majority owner BHP Billiton said .

“There has clearly been an improvement in mine supply ... but it may take a little bit longer than people are expecting before that leads to a market that is in oversupply,” said Nic Brown, head of commodities research at Natixis.

Berry said any surge in copper prices would not last for long as higher private domestic stocks in China and more supply from mines weigh on the market later in the year.

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