(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Supercycles take time to develop and will inevitably span periods of relatively soft fundamentals and price consolidation.
Copper is currently a case in point, according to Goldman Sachs, which pronounced itself a commodities super-bull late last year.
The investment bank maintains its view that “copper stands at the beginning of a multi-year bull market” with the current pause reflecting temporary “investor anxiety” and “liquidation bouts”. (“Copper – Fade the China Dip”, May 27, 2021).
That “anxiety” has seen funds cut sharply their bull copper bets over the last couple of weeks, even as the London Metal Exchange (LME) price has been swinging around the $10,000-per tonne level after hitting its all-time high of $10,747.50 on May 10.
The main source of “fundamental consternation”, Goldman concedes, is China, which until now has been the driver of copper’s pandemic recovery rally but which shows every sign of being glutted with metal after last year’s record imports.
That is feeding a strong counter-narrative that the copper price has peaked for now with the rest of the world not yet ready to pick up China’s supercycle baton.
Funds have evidently decided to take some money off the table and wait and see which narrative turns out to be correct.
Money managers have reduced their net long positioning on the CME copper contract by almost 30% in the space of three weeks.
The collective bull commitment of 33,931 contracts is the weakest it’s been since July last year, when the copper rally was still in its formative stage.
The shift in the investment landscape has been all about profit-taking, funds slashing outright longs that had been accumulated on copper’s April march up towards the $10,000 level.
Few are yet prepared to take a fully contrarian view with outright investor short positioning creeping higher but still small by historical standards.
Bears argue that copper won’t escape the gravitational pull of a slowdown in the world’s largest consumer
A good deal of the investment fizz has also left the London market, where fund net long positioning has fallen to 31,695 contracts, the lowest collective bull bet since October last year.
LME broker Marex Spectron uses its own methodology to assess speculative positioning but agrees with the trend, estimating the investment long has fallen to 28% of open interest from 62% in February, when it was the highest since 2004.
Chinese speculators remain unenthused by copper and that has nothing to do with the government’s increasingly strident warnings about commodity price inflation.
Volumes and market open interest on the Shanghai Futures Exchange copper contract peaked in February and April respectively. Trading activity remains subdued. Open interest has rebuilt a little over recent days but at 339,082 contracts is a long way off its April peak of 394,614 contracts.
China’s army of retail traders evidently prefer the roller coaster that is the iron ore and steel complex right now. The ferrous market has a low price entry point relative to copper and, from a Chinese perspective, a stronger short-term bull narrative of domestic production constraint. It is also, not coincidentally, where the Chinese government is making the loudest noises about speculative excess.
Compare and contrast with the local copper market, where the Yangshan premium, a closely-watched indicator of import demand, has slumped to a multi-year low of $32 per tonne, according to Shanghai Metal Market.
That’s not surprising given the strength of imports since the start of China’s covid-19 recovery early last year. Net imports of refined copper rose by 1.2 million tonnes to 4.4 million in 2020 and remained robust through the first quarter of 2021.
Now, however, the country is showing every sign of entering a de-stocking phase which will coincide with an expected broader slowdown as China’s policy-makers wind in the stimulus cash.
Chinese investors don’t seem enthused by the short-term headwinds facing the local copper market and Western fund managers seem to be expressing the same caution.
What Goldman Sachs terms “fundamental consternation” boils down to the question as to whether the bank’s super-bull case is correct or whether copper is trapped in the same old China cycle.
The narrative is still being contested by the likes of UBS, which expects the price to “moderate over the next 12 months” as the restocking and pent-up demand impetus fades and copper supply bounces in response to higher prices.
“We do not see structural copper shortages in the next two to three years”, according to UBS (“Copper: Mine Supply to lift in 2022/2023”, May 28, 2021).
Goldman couldn’t disagree more, It expects a “substantial” supply deficit in the second half of this year and is holding a 12-month target of $11,500 per tonne.
Doctor Copper has seemingly come to a fork in the narrative road.
Super-bulls like Goldman see copper breaking out of its previous China dependency as the rest of the world embarks on a metals-heavy green industrial recovery strategy.
Bears argue that copper won’t escape the gravitational pull of a slowdown in the world’s largest consumer.
With the physical copper market undoubtedly hitting a soft patch thanks to China, the evidence can be argued either way.
While the jury remains out, fund managers have evidently decided that the safest bet is not to bet.
(Editing by David Evans)
Comments
Brett Kuntze
I dont really know how much to the extent which we are willing to increase copper consumptioni in the race agaginst the so called “carbon budget” that is believed to be rapidly depleting from stubborn dependence on fossil fuels for global economy growth. Really, we can just stop economic activity to preserve the “carbon budget” but this will put undue pressures on other obligations that depend on future stable economic growth . Can we really slow down on renewable energy at the same time we are forging ahead with so much economic growth planning ahead? China balks at the prospect of rising copper prices which tell me that China is still not serious about the “carbon budget” and that they are assuming that we will do nearly everything to displace China’s carbon footprint for years to come so that we can continue to enjoy cheap products from China, can we? People , in general, appears to think and believe that a solar rooftop for everybody is all we will need to fix the “carbon budget”. We are already on drawing boards for tens of million more EVs to be manufactured in the coming years. and we are assuming that we will be installing enough renewables to keep them all full charged. Can we achieve that or will we instead slither away from renewables and toward commercial generators instead to avoid as much copper consumption as possible. Do we have a “copper budget” that we think is more important than “carbon budget” whichever it means .. It looks like to me that we are at the “dead ends” soon enough and decide to slow down our economic activities in order to extend the life of the “carbon budget ” as imaginary as it may be.. We can never know for sure. We will probably be able to do so by curtailing our overdependence on Chinese goods which in turn will put China in “severe depression” in order to preserve our “carbon budget” There are so many other small things we can reduce that we are still unwilling to adopt ourselves as well..
Who will decide?