Column: Copper Crushed as Money Turns Negative on Recession Fears

LONDON (Reuters) – Copper prices collapsed last week to their lowest level in 16 months amid growing fears that inflationary pressures in Western economies will turn into a recession.

Investors are repositioning themselves in the copper, with the few remaining bulls retracting and bears flexing their muscles on the short side.

Copper is just one component of a broader reshaping of outlook playing across the financial spectrum.

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All industrial metals traded on the London Metal Exchange (LME) have been under threat in recent days, astonishingly in the case of tin, whose price has halved since March.

The sales spanned across the commodity complex. Total net purchases across 24 tracked goods fell to a 22-month low, according to Saxo Bank.

The overall concern has gone beyond the finer fundamentals of copper that are still positive.

It remains to be seen just how aggressive funds want to be on the short side, given the potential for a countercyclical recovery in China, the world’s largest copper user.

CME copper money manager websites

Negative transformation

Money managers turned net short of the CME copper contract at the beginning of May, only to be pushed out of their positions by a strong price correction higher. Read more

Then it was concern about Chinese demand that fueled the overall negativity. Now is the fear of demand everywhere else, as rising energy prices slow economic activity in the rest of the world.

Funds responded by raising their short positions on the CME once again, from 40,104 to 51,057 contracts. Long-term positions were reduced to a two-year low of 35,098 contracts.

Net positions flipped short again to 15,959 contracts, off May’s short peak of 17,736 contracts.

However, there is an important caveat to these numbers. The latest Commitments of Traders report shows the positioning scene at the close on Tuesday, June 21st. CME copper breached the key technical support level at $4.00 a pound ($8,818 a ton) the next day.

Given the abundance of regular funds in the CME market, the deterioration in technical signals is likely to trigger another downward shift in the speculative mix.

LME Marex broker makes its own assessment of the investor’s situation and believes that the speculative short position is still expanding. That has ballooned in London now to 43,700 contracts, which equates to 31.7% of open interest as of last Friday.

Basis Marex estimates, the last time money was so negative in relation to copper was in January 2015, when the price started with a “5” and the market was in the final stage of an extended downtrend dating back to 2011.

waiting for china

Three-month copper on the London Metal Exchange is currently trading around $8,520 a ton after recovering from Friday’s slowdown to $81,22.50, the lowest level since February 2021.

Given the waves of gloom that have engulfed the markets, many analysts seem ready for more downward pressure in the coming days.

However, much will depend on whether fund managers build their bear bets or opt for a more hedging and risk-averse approach to copper.

China is the biggest counter-cyclical unknown.

Demand for copper in the country has waned due to months of repeated COVID-19 lockdowns, but there are signs that things are returning to normal.

Quarantine times for incoming travelers have been halved, which won’t do anything directly to copper demand but is emblematic of the broad gradual easing of restrictions. Read more

Beijing has promised more infrastructure spending as a way to stimulate growth after the pandemic, although metals markets have been disappointed by what they have seen so far.

Investors clearly do not believe that China will bail out quickly enough to offset the slowdown in manufacturing in Europe and the US.

However, China is still likely to act as a counterweight to weakness everywhere else. That’s what it has done since the financial crisis, channeling government stimulus down infrastructure and ownership channels to shield the Chinese economy from external shocks.

The dynamic zero-tolerance approach to the coronavirus outbreak has dampened the efficiency of the stimulus so far this year.

But with both Shanghai and Beijing reporting no new cases simultaneously for the first time since February, the prospects for a recovery in the engine room of global manufacturing activity are only getting brighter.

If Chinese demand for copper begins to recover, it will do so on the back of declining inventories in the country. Total stocks listed on the Shanghai Futures Exchange currently stand at 57,153 tons, down from nearly 168,000 tons as recently as March.

It’s a reminder that the copper supply chain still faces challenges, albeit in better shape than last year, when LME shares plunged to near zero and the exchange had to step in to prevent the London contract from becoming disorganized.

But it is clear that fund managers at the moment are not in a mood to worry about the subtle dynamics of copper. What matters is the big picture, and the big picture is the picture of dark economic clouds looming.

The opinions expressed here are those of the Reuters columnist.

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Editing by Jean Harvey

Our Standards: Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed under the Trust Principles to impartiality, independence, and freedom from bias.

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