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

Wed, 9th Sep 2020 01:01

(Repeats from SEPT 8, no changes to text)

* Money manager positioning on CME copper:

By Andy Home

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.


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'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


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.


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

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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