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RPT-COLUMN-Funds collide with fundamentals in red hot copper cauldron: Andy Home

(Repeats from SEPT 8, no changes to text)

* Money manager positioning on CME copper: tmsnrt.rs/2Zg30hl

LONDON, Sept 8 (Reuters) - This year’s turnaround in copper’s fortunes has been dramatic and the metal is glowing red hot, with China’s physical purchases and futures buying by funds both fanning the flames.

Positioning on the CME’s copper contract is the most bullish since the second quarter of 2018, with money managers last week lifting their collective bets on higher prices.

Funds are riding a wave of Chinese buying that has confounded the market and seen London Metal Exchange (LME) copper rise from its March low of $4,371 per tonne to a two-year high of $6,830.

China’s imports are sucking much of the metal which was accumulated during coronavirus lockdowns out of the Western market, galvanizing this new, unexpected market tightness.

EVERYBODY’S GONE SURFING

Money managers continue to pile into the CME copper contract, with net long positioning rising by 6,783 contracts to a fresh two-year high of 69,536 in the week to Sept. 1, the latest Commitments of Traders Report shows.

This amounts to a massive collective U-turn since the first quarter of 2020, when the entire industrial metals complex was in meltdown as the COVID-19 pandemic knocked out key end-use sectors such as automotive and aerospace.

Many funds simply left the market with CME copper open interest collapsing to four-year lows by April. Those that remained were overwhelmingly in the bear camp, the net short ballooning out to 58,557 contracts in February.

Open interest has since rebuilt, as funds have lifted outright long positions from under 30,000 contracts in early April to a current 89,815 contracts.

Equally significant has been the wholesale close-out of short positions. The current 20,279 contracts is the most marginal bear positioning since early 2017.

Who wants to be short in a tightening market?

CHINA SURPRISE

China’s current draw on refined metal from the rest of the world is unprecedented. The preliminary August headline figure may have been down 12% from July, but the comparison is with an all-time record high month.

The underlying trend remains super-strong. Total unwrought copper imports have risen by 38% to 4.27 million tonnes so far this year.

If August’s refined copper component conforms with recent patterns, it would mean China has imported 3.03 million tonnes of refined metal. That’s 833,000 tonnes more than was imported in the first eight months of 2019. Imports already exceed the total annual intake of 2009, when Chinese buying last turned around a bombed-out copper market.

China’s copper sector has grown ever larger over the last 10 years and this collective restock, both commercial and possibly state, is coming from a much higher base.

It is also being accentuated by a shortage of raw materials.

Although copper supply was less directly impacted by COVID-19 lockdowns in producer countries than other metals such as zinc, it is clear that Chinese smelters are struggling.

Imports have risen in each of the last eight years as China has built out ever more smelting capacity. More of the same was expected for this year, until mines started closing under national quarantine measures.

Yet imports of copper concentrates fell by 1.4% by bulk weight in the first eight months of 2020, while tension in the supply chain is also evident from falling smelter treatment charges, a sign of increased competition for material.

The 12-member China Smelters Purchase Team (CSPT) lowered its treatment charge floor price to $53 per tonne and the refining charge floor to 5.3 cents per pound for third-quarter shipments. That’s the lowest since at least 2016.

Imports of scrap, a significant input for both smelters and first-stage users, continue to run at historically low levels due to confusion surrounding China’s new import regulations for higher-grade material.

Cumulative scrap imports fell by 49% to 506,000 tonnes in January-August. Before Beijing started closing the door on what it termed “foreign garbage” in 2018, China was importing around 3.5 million tonnes per year.

A shortage of both scrap and concentrate is diverting demand into the refined metal segment and accentuating an already giant restock.

NO PICNIC FOR LONDON BEARS

The flip side to China’s buying spree has been a fast depletion of LME stocks, which have slumped by 70% since the end of May to just 76,550 tonnes.

Bears with short positions are on the defensive as pockets of tightness open up along the length of the copper curve.

“Tom-Next”, the cost of rolling a position overnight in the London market, flexed out to $14 per tonne on Tuesday morning.

The full cash-to-three-months period CMCU0-3 closed Monday valued at a backwardation of $21.75 per tonne and is now showing at an even tighter $30.00.

There’s not even a dominant position holder to blame. The LME’s reports are showing only one entity holding a relatively modest 30-40% of available stocks.

Critically, the cash premium for LME delivery is failing to attract sufficient metal to rebuild inventory and quell the spread tightness.

Physical holders are evidently keeping a tight grip on their stocks, assuming they haven’t already shipped them to China.

ONWARDS AND UPWARDS?

There are plenty of reasons for caution, not least copper’s near straight-line recovery from its coronavirus crisis lows and the possibly deceptive optics of LME copper stocks.

However, analysts are rapidly reassessing Doctor Copper’s prospects with Citi leading the bull chorus with a Sept. 2 research note titled: “Why copper to $8,000 per tonne isn’t far-fetched.”

Citi argues that previous Chinese stimulus packages in 2009 and 2016 led to fund-driven copper rallies which extended a further 20-30% as physical deficits materialized in 2010-2011 and 2017-18.

The funds, in other words, moved faster than the physical copper market to price in Chinese stimulus.

The question is, are they calling it right this time?

Editing by Alexander Smith

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