(Repeats April 20 column without changes. The opinions
expressed here are those of the author, a columnist for Reuters)
* CME copper money manager positioning: https://tmsnrt.rs/3szjTiT
* LME copper money manager positioning: https://tmsnrt.rs/3tzeY2D
By Andy Home
LONDON, April 20 (Reuters) - Funds continue to reduce their
long exposure to the copper market even as the bull clamour for
higher prices grows ever louder.
Goldman Sachs last week doubled down on its supercycle
shout, forecasting copper would average $15,000 per tonne in
2025 in a headline-grabbing April 13 research note titled
"Copper is the new oil".
Citi is also firmly in the bull camp with a short-term
target of $10,500. "We highlight that the 'super' part of the
supercycle is now" with the market facing the largest supply
deficit since 2003-2004, the bank said. ("Metals Weekly", April
19, 2021)
Copper is bubbling away just below February's decade high of
$9,617 per tonne, London Metal Exchange (LME) three-month metal
last trading at $9,400.
Investors appear to remain highly wary, however, and perhaps
for good reason. While a supercycle may be coming, copper is
right now still heavily reliant on the Chinese cycle.
And the world's largest buyer is making it very clear that
it doesn't want raw material prices to rise any further.
CUTTING LONG EXPOSURE
The fund positioning landscape on the CME's copper contract
has shifted significantly over the last couple of
months.
The big net long that built as copper rallied strongly off
last year's early COVID-19 lows has more than halved since
February.
The stampede to cut outright long positions has abated
although collective bull positioning has slipped further to
76,167 contracts, the lowest collective holding since July last
year, according to the latest Commitments of Traders Report
(COTR).
Short positions, meanwhile, have been creeping steadily
higher. At a current 37,894 contracts, bear bets are by no means
large by historical standards but are still the heaviest they've
been since June last year.
There has been a similar bull retreat on the London market,
albeit less pronounced than that on the CME.
Investment funds have reduced their net LME copper long
positioning from a February peak of 47,897 contracts to a
current 35,950.
Investment money flowing through the "other financials"
category of the LME's COTR - a mix of insurance and index
players - has been reducing its long exposure since August last
year, albeit with signs the retreat may be coming to end.
In China, meanwhile, the big bull copper play held through
Dalu Futures has dropped off the radar amid a
notable decline in activity on the Shanghai Futures Exchange's
copper contract.
CHINA WARNINGS
Some of the recent speculative heat in China's commodity
markets has been doused by increasingly strident warnings from
senior policy-makers about the perils of high prices.
Premier Li Keqiang pledged earlier this month to strengthen
control of raw materials, warning that "surging international
commodity prices have brought great pressure on companies'
costs."
The coded warning turned to explicit warning today with the
Ministry of Industry and Information Technology asserting its
determination to keep a lid on commodity inflation.
The ministry will work together with relevant departments to
stabilise prices, fend off panic buying or hoarding and
"resolutely" crack down on market monopoly and malicious
speculation, according to spokesman Huang Libin.
He was speaking at a press conference, which is itself a
telling sign that China's leadership wants everyone to get the
message.
This is Chinese policy-makers' standard reaction to high
prices and if the warnings don't deter the speculative hordes,
there are plenty of other levers to pull.
STOCKS THREAT
One already used in the aluminium market is to remind
everyone the Chinese government itself holds metals stocks and
that it might consider releasing them if things get too
out-of-hand.
It's a weak threat in the case of aluminium because no-one
thinks the inventory is big enough to make much of a dent in the
domestic market-place.
But China holds a lot more copper. Indeed, state entities
are widely thought to have added up to another 600,000 tonnes
last year taking the total to in excess of two million tonnes,
although no-one knows for sure given the country's strategic
copper stocks are shrouded in secrecy.
There is a precedent for China releasing its copper
reserves. It did so in 2010-2011, when the price was trading at
record highs above $10,000 per tonne.
Given where the price is now and given the government's
clear dissatisfaction with the inflationary flow-through from
rising commodity prices, it might not be long before the copper
market also gets a gentle reminder of what's sitting in state
warehouses.
SUPERCYCLE VS CHINA CYCLE
More fundamentally, China's policy-makers can dampen overall
growth by cutting off the credit taps to key end-use sectors
such as construction.
Indeed, a cooling of China's post-pandemic recovery is why
analysts such as those at Capital Economics remain in the bear
camp, arguing that Chinese GDP will slow over the coming
quarters "which underpins our forecast that industrial metals
prices will end the year lower". ("Commodities Weekly Wrap",
April 16, 2021).
The copper market appears to be reaching a defining moment
when it decides whether we're in a new supercycle or the same
old China cycle which has defined pricing for over a decade.
If the latter, copper and other raw materials are going to
face the increasing headwind of a slowing Chinese demand pulse.
If, however, the supercycle super-bulls are right, the
Chinese infrastructure momentum will pass to the rest of the
rest of the world, compensating for any cyclical slowdown in
China.
The jury is very much still out.
And a lot of the funds are out as well, waiting for Doctor
Copper to come to a decision.
(Editing by David Evans)