Funds have slashed their long positions on the copper market as high and rising inventories cause a collective rethink of the market’s short-term prospects.
Investors rushed to buy copper during the second quarter, betting the metal would benefit from a turn in the economic cycle and a green-energy demand booster.
The bull narrative was spiced with concern that supply simply wouldn’t keep up, creating yawning deficits and potentially explosive higher prices.
The reality has turned out to be slightly different.
China, still the engine room of global copper demand, shows no signs of escaping its property drag. Copper stocks in the country are unseasonably high. Worse, Chinese smelters have been exporting large volumes to London Metal Exchange (LME) warehouses. LME inventory last week touched a three-year peak.
The LME three-month price has retreated from its record high of US$11,104.50 a tonne in May to the current US$9,000.
The bull party is on hold. For now at least. The consensus remains for higher prices later this year.
Money managers have slashed long positions on the CME copper contract over the course of June and July.
Bets on higher prices peaked at 141,204 contracts in May, when the U.S. market was in the grips of a ferocious squeeze.
Money managers have since scrambled to get out just as fast as they rushed to get in. Long positions have shrunk by 80 per cent to 78,790 contracts.
There has been little change in fund positions on the short side, suggesting the action has been a combination of profit-taking by the fortunate and stop-loss selling by the less fortunate on the price retreat.
Funds are still collectively net long of CME copper, but net length has been cut from a May peak of 75,342 contracts to just 19,515 as of the close of business on July 23.
The London market has seen a similar fund exodus, with the collective net long position contracting from a May peak of 71,899 contracts to 29,694 as of the July 22 close.
Rising copper inventory has undermined a bull narrative of scarcity.
Shanghai Futures Exchange (ShFE) stocks this year broke with a seasonal pattern of rapid declines after the Lunar New Year holidays. They have edged lower in recent weeks but remain above 300,000 tonnes, a level last seen in 2020 when China was reeling from the first round of its COVID-19 lockdown.
A sharp jump in exports, unusual for the world’s largest buyer, has added to concerns China’s giant manufacturing sector is still struggling to offset demand weakness from the troubled property market.
Outbound shipments totalled 231,611 tonnes in May and June, breaking all previous records.
Much of that metal has been shipped to LME warehouses in South Korea and Taiwan, which have seen inflows of 65,050 and 71,600 tonnes, respectively, since the start of June.
Chinese brands represented more than 45 per cent of LME on-warrant stocks at the end of June, up from less than 1 per cent at the start of the year.
Copper has also started arriving at CME warehouses, where stocks shrank to just 8,117 tonnes in July, fuelling the squeeze across the front part of the forward curve.
CME inventory has been rebuilt to 12,618 tonnes with inflows at CME warehouses in Detroit and New Orleans.
The relatively modest pace of rebuild reflects the limited delivery options available to shorts. The Chinese metal washing up in the LME system, for example, is not registered for CME delivery.
Copper inventories often rise over the Northern Hemisphere summer months, but the combination of stubbornly high stocks in Shanghai and China’s recent exports have sapped bullish spirits.
The lack of any detailed announcements from China’s third plenum has added to the sense of disappointment.
Investors, it appears, jumped the gun on copper, causing prices to rise too fast and too soon.
Analysts at Citi think “copper prices will struggle for direction in the weeks ahead.” But the bank forecasts prices to rise to US$9,500 a tonne within three months and to touch US$11,000 early next year.
It’s not alone.
The median forecast of the latest Reuters quarterly poll of analysts was for the cash LME price to recover from US$9,737.50 in the third quarter to US$10,000 in the fourth quarter.
The lowest forecast for the current quarter was US$9,200 and that for the next quarter was US$9,000. The price is already there.
Analysts evidently aren’t looking for much more downside with a solid consensus that the bull rally will resume after the summertime blues.
Just as long as not too much more Chinese metal turns up in LME warehouses over the next couple of months.
The opinions expressed here are those of the author, a columnist for Reuters.