Column: Funds sell copper as weak demand trumps supply pressures

The positioning pivot has played out against early-year price weakness. London Metal Exchange (LME) three-month copper hit a five-month high of $8,716 per metric ton in late December but has been on the back foot ever since, last trading around $8,400.

A string of mine supply hits has caused analysts to revise down their expectations of surplus this year, but copper’s micro dynamics are being overshadowed by a gloomy macro picture.

New year, new shorts

Money managers flipped between net long and net short on the CME copper contract several times last year as they tried to navigate choppy range-bound price action.

The bias turned to the long side in November after the LME three-month price held key technical support around the $7,870-per ton level and started moving higher.

Funds were net long of CME copper to the tune of almost 15,000 contracts at the close of December.

However, the new year has brought about a collective re-assessment, net positioning shifting decisively to the short side in the first half of January.

The net short amounted to 25,309 contracts as of the close of business a week ago, the largest bear bet since July 2022.

Outright long positions have been pared to 44,634 contracts, the lowest since June last year, while fresh selling has lifted outright short positions to 69,943 contracts from 45,127 at the end of December.

Supply rethink

The collective bet on lower prices looks out of synch with recent supply-side developments.

Treatment charges levied by smelters for converting mined concentrates into refined copper have been falling fast as availability tightens.

Spot terms are currently assessed by pricing agency Fastmarkets in the low $30s per ton, compared with benchmark 2024 terms of $80 per ton negotiated in November.

Too many smelters are chasing too little concentrate.

The closure of First Quantum’s Cobre Panama mine in December has opened up a hole in the raw materials supply chain.

Moreover, lower production guidance by both Anglo American, and Vale has seen analysts take the red ink to their medium-term supply forecasts.

Macquarie Bank, for example, has lifted its call for a price low of $7,600 per ton in the third quarter of this year to $8,000, citing “a larger concentrate deficit and a smaller metal surplus than previously forecast for 2024”.

Manufacturing weakness

However, the renewed focus on copper’s predictably unpredictable supply dynamics appear to have made little impression on fund managers.

They are likely more concerned about the demand outlook for copper and other industrial metals.

China, the world’s top copper user, is facing a crisis of investor confidence with stock markets tumbling this week.

“The recovery from zero-Covid – disappointing though it was – is over,” according to the authors of the China Beige Book (CBB).

The CBB’s latest analysis of fourth-quarter 2023 data shows “national revenue and profit growth sliding into year-end, as did investment, hiring, sales volumes, output, and both domestic and foreign orders”.

China’s giant manufacturing sector put in a “solid” performance, but it was less than stellar, according to CBB.

Western investors appear to have given up any hope that policy-makers can find a quick fix.

Factory activity just about everywhere else continues to contract. Europe’s manufacturing indices have been in negative territory for 18 straight months, while US activity has been contracting for 14 months.

Energy transition sectors such as wind and solar power generation and electric vehicles continue to outperform, but demand for industrial metals cannot fully escape the drag of the old economy.

Until global manufacturing picks up, it’s going to take a lot more supply disruption for fund managers to change their minds that copper is anything other than a sell.

(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)

(Editing by Jan Harvey)