* CME Fund Positioning: https://tmsnrt.rs/2Nm5Mw2
* Shanghai Copper Market: https://tmsnrt.rs/2NhWst5
By Andy Home
LONDON, Aug 19 (Reuters) - There's been a lot of talk aboutinverted yield curves over the past few days.
Specifically, last week's inversion of the two-year and10-year U.S. Treasury notes has raised the spectre of recession,sending tremors through U.S. stock markets.
Financial market analysts are poring over their historicaldata for clues as to how likely and how severe a globalcontraction might be.
Those who follow the copper market, however, will know that"Doctor Copper" with his honorary degree in economics got therefirst.
London Metal Exchange (LME) three-month copper hasslumped from above $6,600 per tonne in April to a current$5,800.
Global economic weakness is being led by the manufacturingsector with activity contracting or slowing just abouteverywhere. That includes China, the powerhouse of industrialmetals demand.
Funds are now taking an ever more bearish view of copper'sprospects on the CME market.
The current "big short" is the biggest yet seen and the onlysurprise is that copper has not yet cracked under the weight ofall this money.
It helps that copper is once again going through one of itsperiodic supply squeezes.
It helps a lot more that Chinese speculators don't yet seemready to turn as sour on copper as the CME bears.
THE EVER BIGGER SHORT
Funds were holding a collective net short of 68,545contracts on the CME copper contract as of Tuesday, Aug. 13.
That was down by 6,052 contracts on the previous week butthe week-on-week change is insignificant relative to the overallscale of bear positioning.
Money managers' short positions had hit a new all-time highof 118,448 contracts the previous week, eclipsing the previousrecord big short in June 2019.
Expressed relative to open interest, bear bets are as largeas they've been since the global financial crisis of 2008-2009,according to analysts at Citi. ("Commodity Flows", Aug. 19,2019).
You can understand the money men's logic.
Manufacturing activity is contracting in both China and theeuro zone and stalling sharply in the United States.
The automotive sector, a key driver of demand for metalssuch as copper and aluminium, is particularly weak as a cyclicaldownturn is compounded by the structural challenges of a massmigration to electric vehicles.
Against such darkening prospects, a simmering U.S.-Chinatrade war is doubly negative, the broader impact on global tradecoming with a specific hit on already stuttering manufacturingsupply chains.
The financial part of the copper market is betting there'sworse to come.
SUPPLY SQUEEZE
The industrial part of the market is torn between thedarkening macro clouds and copper's still robust micro dynamics.
It's clear there's no shortage of refined copper right now.LME warehouses received almost 65,000 tonnes of metal last week,although the size of the deliveries may have had more to do withstorage than copper price drivers.
Further up the supply chain, however, copper supply is introuble again.
The International Copper Study Group (ICSG) forecast in Maythat global mine production would be flat this year. It willstruggle to meet even that low-ball assessment.
World mine production actually fell by 1% in the first fourmonths of 2019, according to the ICSG.
Smelters are having to accept extremely low charges forconverting mined concentrate into refined metal.
The 10-member China Smelters Purchase Team (CSPT) loweredits minimum treatment charges to $55 per tonne and 5.5 cents perlb for third-quarter deliveries.
That translates into an acute margin squeeze for higher-costsmelters with CSPT members starting to talk about potentialproduction cuts.
During past periods of low copper prices, too muchproduction was as much the problem as demand.
This time around, there is no flood of new mine supply.There's not even a trickle.
It's noticeable that LME positioning isn't nearly as bearishas that on the CME.
LME broker Marex Spectron estimates the net speculativeshort on the LME contract was 7.5% of open interest lastWednesday, compared with peak short positioning this year of12.3% in June.
NO BEARS IN CHINA?
While New York's bearish and London's more ambivalent, theall-important Chinese segment of the speculative spectrumdoesn't appear to have any view.
Copper seems to have fallen off the investment radar thisyear in China, possibly because there have been better returnsto be made in "hot" markets such as iron ore and, more recently,nickel.
The Shanghai Future Exchange's copper contract saw volumesslide by 24% in the first half of the year and they aredwindling further this month. Current market open interest of622,710 contracts is low by Shanghai standards.
It is the lack of any bear momentum on the Shanghai marketthat is helping copper withstand the bear attack on the CME,according to Citi. ("Metals Weekly", Aug. 18, 2019)
It's possible that Chinese speculative money may bereluctant to short copper because it believes a new round ofgovernment stimulus is on its way. Bears may also be mindful ofthe supply-chain dynamics pressuring Chinese smelters.
Then again, maybe the massed ranks of Chinese speculatorsjust haven't been thinking much about copper at all.
It could be a problem if they do.
Looking back at the Shanghai copper contract over the2013-2016 bear market, Citi analysts identify five occasionswhen Chinese investors went aggressively short copper, threetimes to the tune of around $4 billion. The collective bear betsincreased to $7 billion and a huge $10 billion on the other twooccasions.
Citi's conclusion is that if Chinese speculators were tocommit to a median-size bear attack, "we find that this wouldresult in an $800-per tonne copper sell-off from $5,700 pertonne to $4,900."
By which stage you wouldn't need an inverted yield curve totell you something was very amiss in the global economy.
Copper's not there yet but it's finely balanced withuncommitted Chinese players holding the key to the next majormove.
(Editing by Susan Fenton)