From Blenheim to BlackRock, here’s why everyone’s bullish about copper

(Bloomberg) — As the metals world descends on London this week, it seems everybody has something in common: they’re all copper bulls.

Speaking ahead of the annual LME Week gathering that starts Monday, more than a dozen commodity-focused hedge funds, trading houses, producers, banks and brokers were almost unanimously positive on the near-term outlook for the metal used in pipes and wires. Metals specialists consistently pointed to the disconnect between big-picture concerns for the economy and a rapidly- tightening physical market.

It’s been a tough few months for copper. Yet spot sales of copper to China are booming, say executives at two leading copper suppliers, reaching levels not seen for several years, and exchange inventories have fallen sharplyWorries about a global trade war’s effect on economic growth helped push the metal into a bear market in August and the price recovery since then has been tepid.

Copper’s got the potential to “rocket,” said David Lilley, an industry veteran who parted ways with famed fund Red Kite to set up Drakewood Capital Management earlier this year. “If everybody who’s sold it in the past three months wants to buy it back I’m not sure who’s going to sell it to them.’’

In China, physical demand for copper has been driven by a combination of lower prices and looser credit conditions, while stimulus measures are helping to unlock pent-up demand. A price differential between London and Shanghai last month also offered quick profits to importers.

Copper’s longer-term outlook is also being bolstered by miners’ newfound discipline, said Evy Hambro, who manages BlackRock Inc.’s World Mining Fund. The lack of investment in new mine supply “is building up to this very strong case for the next few years,” he said in a Bloomberg Television interview.

Copper traded at about $6,198 a metric ton in London on Friday, for a 15 percent drop this year.

Prices look set rally through to the end of the year as fundamentals reassert themselves, according to Commodities World Capital LLP’s Luke Sadrian, who’s in the process of raising capital for a new metals fund ahead of a planned launch in the first quarter of next year.

“So much of the move in copper this year has to do with the fact that it’s been seen as the poster child for the trade war,” he said. “But if you look at inventories it’s clear the market is very tight, and we haven’t seen capex going in on the supply side, so it’s becoming the consensus that copper should move higher from here.”

London copper prices have already shown some response to the tighter physical market in China, said Kieran Fontaine, a metals analyst at Andurand Capital Management LLP. The metal has risen about 7 percent from August’s low.

“The China cathode market looks tight with strong demand for imported units, a lack of available scrap and lean inventories,” said Fontaine. “There are reasons to be optimistic from here.”

To be sure, the threat remains that the drag on global growth caused by escalating trade tariffs will filter through to copper demand.

For now, China’s efforts to stimulate and insulate its domestic economy support the case for short-term bullish bets on the metal, said Ingrid Sternby, a senior analyst at Blenheim Capital Management LLP, one of the largest and longest-standing specialist commodity hedge funds.

“The macro headwinds will clearly put a cap on the rally, but there’s a big risk in this environment that the market will get complacent and miss the strong micro signals,’’ she said. “At this stage, copper’s strong exposure to the Chinese economy is a good thing.”

What others are saying about copper: 

Commodities bank: “There’s a pretty interesting dichotomy between the macro and micro in metals. We’ve seen macro and trend-following funds running fairly large short positions as these markets have been moving lower, but during these last couple of months there’s been quite a bit of physical tightness, especially in copper,” said  Michael Nowak, co-head of metals trading at JPMorgan Chase & Co.  The world’s largest publicly traded copper producer: “It’s not sustainable. Either the copper price adjusts to the positive fundamentals, or the trade issues lead to a deterioration in the fundamentals, but that deterioration has not occurred yet. And it’s perplexing,” said  Richard Adkerson, CEO of Freeport-McMoRan Inc. Chilean copper miner: “The outlook for copper is very positive, I think on the demand side emerging markets continue to drive a lot of physical demand, China demand for copper is expected to grow this year above 4 percent, and also in other parts of the world like the US and Europe demand is actually — physical demand — is quite strong,” said Ivan Arriagada, chief executive officer of Antofagasta Plc. “On the supply side, copper is in shortage.”

(By Mark Burton and Jack Farchy)