(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, March 12 (Reuters) - In a tentative return to Doctor Copper for the money men, investors are starting to buy back into the metal after aggressively shorting the market at the start of the year.
Some of the gloom weighing on the copper price appears to be lifting, with more positive noises from U.S.-China trade talks and expectations that Beijing’s latest stimulus boost will revitalise a flagging manufacturing sector.
Copper’s own micro dynamics, in particular low visible stocks on the world’s three exchanges, are also fanning bullish enthusiasm.
Funds increased their net long holdings on the CME copper contract by 7,488 contracts to 23,126 in the week to March 5, a level not seen since the middle of last year.
However, it’s also clear that views on the price within China are far more mixed with both short and long positioning rising on the Shanghai Futures Exchange (ShFE).
Funds started the year in a super-bearish mood, according to the U.S. Commodity Futures Trading Commission (CFTC), which has now caught up with the data gap caused by the five-week government shutdown.
Outright short positions flexed out to a record 88,003 contracts in the middle of January, marginally eclipsing previous bear peaks in July 2018 and September 2016.
In part this reflects the increased speculative capacity that has been evident on the resurgent CME copper contract since 2016. But copper has been used to express a negative view on the combination of a China slowdown and what at that stage looked like an imminent full-scale trade war.
The macro pessimism interacted with deteriorating technical signals as copper toyed with long-term chart support levels on both sides of the Atlantic.
London Metal Exchange (LME) three-month copper held, just, the band of support below $5,800 per tonne, where last year’s lows were being reinforced by the 200-day moving average.
The subsequent price recovery to today’s $6,470 has been matched on the CME, generating a rapid reduction in short positioning to 49,558 contracts last week.
At the same time investors have been creeping back in on the long side, lifting their collective positioning to 72,684 contracts. Despite a slight 1,402-contract decline in the last week, the collective bull statement is as strong as it’s been since the middle of last year.
Citi analysts’ take on the CME positioning report is that a large number of market participants have been making small bets on the metal, with the average size of long positions remaining low during the recent rise in total speculative positions. (“Metals Weekly”, March 11, 2019)
“We believe this is evidence that a large number of participants have been using copper as a way to gain modest exposure to a potential trade deal and/or China easing, supported also by copper’s bullish fundamentals,” the bank said.
Investors are in essence taking a view that the worst of the current Chinese manufacturing slowdown has already been priced into the copper market.
A surge in total social finance — a measure of government spending in China — in January is evidence that the stimulus taps have been turned on. Metals markets are, however, expecting a six-month lag before the money trickles through to the real economy.
The Chinese themselves appear more ambivalent on the outlook - the slowdown may feel just a bit too real for local investors.
Open interest on the ShFE copper contract has been building since December, albeit from a low level.
The Chinese copper price has also been rising in tandem with London and the CME but the increase in activity has been fairly evenly matched between longs and shorts, up by around 95,000 contracts and 92,000 contracts respectively since the December troughs, according to exchange data.
And with weakening manufacturing activity and rising visible ShFE inventory, up 117,000 tonnes since December, copper’s micro dynamics may not feel so compelling when seen from Shanghai.
The rising inventory may yet prove problematic for copper bulls.
Key among bullish fundamentals cited by Citi is the low level of stocks held in CME and LME warehouses.
LME inventory of 112,725 tonnes is at its lowest level in a decade and timespreads have contracted into backwardation in the last three weeks.
The resulting premium for cash metal, last at $28 per tonne over three-month metal, should draw more copper out of the woodwork, particularly that accumulating in China.
There has been much market chatter about Chinese smelters moving copper into bonded warehouses in preparation for dispatch to the nearest LME sheds in South Korea but the anticipated tonnages haven’t turned up so far.
While copper is flowing into the LME storage network, it is doing so in dribs and drabs and not in sufficient quantities to halt the slow slide.
Should that change, it risks undermining the bull case that copper is fundamentally poised to surge higher as the seasonal second-quarter global demand surge kicks in.
There are, moreover, still reasons to be cautious about the new macro optimism.
A new trade agreement between the United States and China is by no means a done deal and even Chinese stimulus - the third mega boost to the economy in the space of a decade - may yet turn out to be not quite what it seems, with Beijing seemingly more aware of avoiding the excesses created by the previous two.
Some money will be channelled into metals-intensive infrastructure and construction but less than in the past, meaning this round of stimulus could turn out to be metals-lite.
All good reasons to be cautious but January’s big copper short has been much diminished and the money men seem to be turning more positive, albeit cautiously, on the price outlook.
Editing by Kirsten Donovan