(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
Copper has begun the New Year on a surge, with funds piling back into the market in anticipation that China’s rapid emergence from a year of lockdowns will translate into recovering demand in the world’s largest metals buyer.
London Metal Exchange (LME) three-month copper broke back up through the $9,000-per tonne level last week for the first time since June. Currently trading around $9,130, the copper price is up by 9.6% since the start of January.
The rally has been driven primarily by shifts in fund positioning on both the LME and the CME with the bulls back in town and bears in retreat.
Investors played copper from the short side for much of last year, if they were prepared to engage at all. Rolling lockdowns in China, an energy crisis in Europe, and aggressive rate hikes in the United States were all good reasons to give Doctor Copper a wide berth.
The funds’ sudden return is a sign that many are betting on a much sunnier outlook.
Money managers have rapidly accumulated long positions on the CME copper contract this month, lifting bets on higher prices by 32% to 65,703 contracts, according to the latest Commitments of Traders Report.
The resulting price surge has forced bears onto the back foot, outright short positions sliding from 40,807 contracts to 36,907 in the week to last Tuesday.
Funds were net long to the tune of 28,796 contracts on that date, the most bullish collective positioning since last April.
The same dynamic is playing out on the London market with the price rally placing some $3 billion of short positions under pressure, according to analysts at Citi. (“Metal Matters”, Jan. 17, 2023)
Citi estimates a 400,000-tonne collective investment short position was accumulated over the middle of last year in a $7,800-8,600 price band. “To the degree, these short positions have not already covered, this may support copper in the short term”, the bank said.
Renewed speculative interest in copper has been evident for several months with global trading activity showing signs of recovering from a long slump.
All three major copper venues – the LME, CME and the Shanghai Futures Exchange (ShFE) – saw volumes and open interest fall consistently over much of 2021 and the first half of 2022.
The market stopped contracting around July, with both the LME and CME registering consistent year-on-year volume growth over the back end of 2022.
LME copper volumes ended the year down by just 1.9% on 2021 levels, the most resilient performance among the core contracts in a year of nickel-induced turmoil on the London market.
CME futures open interest fell to 149,642 contracts at the end of November, its lowest end-month level since 2014. It has since rebounded to a current 198,018.
CME options trading has been booming. Volumes of vanilla monthly options hit an all-time record of 126,171 contracts in November. Open interest at the end of December was also an all-time high of 82,599 contracts.
Activity has spread to the CME’s newer weekly options contracts and its “micro” copper product, a tenth the size of the main contract but one that has already traded the equivalent of over 600,000 tonnes since its May launch.
Doctor Copper, it seems, is back on the investment radar after a year in the wilderness.
Investors’ rekindled enthusiasm for copper’s prospects jars with the current somewhat gloomy picture of industrial recession in Europe and sharp economic slowdown in the United States.
The World Bank last week slashed its global growth forecast for this year from 3.0% to 1.7% the slowest pace outside the 2009 and 2020 recessions since 1993.
It’s clear, though, that copper long positioning is primarily a bet on Chinese recovery, underpinned by measures to revitalize a foundering property sector and more metals-intensive green infrastructure.
It’s worth noting that copper’s gains have been overshadowed by those of iron ore, which is even more leveraged to a resumption of Chinese property construction. Dalian iron ore futures jumped 3% last Friday to hit 17-month highs.
Both commodities are pricing in a full-blown bounce-back in Chinese activity after the New Year holidays.
There is plenty of uncertainty around covid transmission rates, the timing of any meaningful turnaround in the property market, and the likely negative hit on exports from slower growth everywhere else.
If copper is already pricing in a full recovery, the reality is only likely to disappoint.
Doctor Copper’s new fund friends may have to be patient.
(Editing by Jane Merriman)