Copper finely poised between negative macro and robust micro — opinion
Copper last week hit a year-to-date low of $5,518 per tonne in the London market as the macroeconomic picture becomes ever gloomier.
Funds remain heavily short, betting that copper demand is set to worsen amid what is looking like a synchronised downturn in the global manufacturing sector.
The copper price is starting to buckle under the weight of speculative selling pressure but it’s not yet ready to collapse.
London Metal Exchange three-month copper could easily have imploded on last Tuesday’s lurch lower but instead clawed its way back to close the week at $5,833.
Market sentiment was helped by the prospect of renewed trade talks between the United States and China but also by copper’s still robust internal supply-demand dynamics, not least China’s continued appetite for imported metal.
The copper market, not for the first time, is finely balanced between the forces of macro negativity and micro positivity.
The economic storm clouds darkened again last week.
U.S. manufacturing activity contracted for the first time in three years in August, the Institute for Supply Management’s (ISM) index falling to 49.1 last month from 51.2 in July.
It was the fifth straight monthly decline in the index with new orders tumbling sharply to 47.2, the lowest level since June 2012.
The United States had been an increasingly isolated bright spot in the broader manufacturing gloom, lending extra significance to last month’s weak snapshot.
In the euro zone, manufacturing activity has been contracting for seven straight months with German copper products maker Wieland reducing working hours this month in the face of disappointing demand.
Activity remains soft in Asian manufacturing hubs such as Japan, South Korea and, critically for industrial metals, China.
China’s official purchasing managers index remained in contractionary territory for the fourth straight month in August, although the private-sector Caixin index generated a slightly more positive reading above the 50 growth-contraction threshold. Even it, though, showed continued weakness in new orders, both domestic and export.
The big short
Given such flashing warning signals about the health of global manufacturing, it should be no big surprise that funds continue to hold a big collective short position on the CME copper contract.
The latest Commitments of Traders Report showed funds holding outright short positions of 117,898 contracts as of last Tuesday, within touching distance of the all-time record of 118,448 contracts seen in the middle of last month.
Copper’s late-week recovery will have likely caused some trimming of that position but the overwhelming weight of money on the U.S. exchange is still betting against Doctor Copper.
Funds active in the London market appear to be more ambivalent, LME broker Marex Spectron assessing the net speculative short at a relatively modest 6.4% of open interest as of last Wednesday.
Chinese speculative players remain sidelined, judging by the low volume and open interest levels on the Shanghai Futures Exchange (ShFE) copper contract.
That in itself is probably a key factor in copper’s ability to withstand the selling heat on the U.S. market.
Chinese imports still robust
China is also a key positive factor in copper’s supply-demand dynamics right now.
Preliminary figures for August showed imports of unwrought copper, aggregating refined metal, anode, alloy and semi-fabricated products, falling by 3.8% to 404,000 tonnes in August with year-to-date imports tracking 10.8% lower than last year.
However, it’s worth remembering that last year’s refined copper imports were an all-time record at 3.8 million tonnes, putting the headline declines into context.
Given the undoubted weakness in Chinese manufacturing activity recently, current import volumes are surprisingly robust.
Particularly since China is still actively building out its own copper refining capacity to reduce its call on metal from the international marketplace.
The country’s smelters continue to hoover up raw materials with imports of mined concentrates booming. Last year’s imports came in at a record 19.7 million tonnes (bulk weight) and imports in the first eight months of this year were up another 11% at 14.4 million.
It’s possible that declining scrap imports are boosting import demand for both raw materials and refined metal.
Scrap flows have been falling since the start of last year due to tightening purity thresholds for Chinese imports and, more recently, tariffs on U.S. copper scrap.
China imported 32% less copper scrap last year and the slide has extended into 2019 with January-July imports down a further 27%, although rising purity levels mitigate some of the headline drop in bulk tonnage.
Total imports of copper in all forms suggest no dramatic collapse in demand from the world’s biggest buyer.
Indeed, China’s continued import strength has kept a lid on visible exchange inventory. Combined stocks registered with the LME, the CME and the ShFE totalled 519,500 tonnes at the end of August, up 169,000 tonnes since the start of the year but down by 54,000 tonnes on August 2018.
Bad news is good news?
The copper price is still in dangerous chart territory with the threat that another slide could trigger the sort of follow-through selling activity that was conspicuous by its absence last week.
Hopes for a breakthrough in the stalled U.S.-China trade talks provided an important lifeline for copper over the back end of last week.
But we’ve also entered a period of the economic cycle when bad news is taken by the markets as good news.
The faster economic indices deteriorate, the greater the expectations for a stimulus reaction whether it be in the form of U.S. Fed interest rate cuts, more quantitative easing from the European Central Bank or more infrastructure spend from China.
The latter may be one reason why Chinese speculators don’t much fancy going short copper, even if it’s clear they’re not enthused about going long either.
Coordinated policy action by other central banks may cause bear funds to blink, if they believe it will stabilise global factory activity.
Copper’s own fundamentals, however solid they might be right now, are serving only to hold the price at these low levels.
The next big move will be determined by the money men.
(By Andy Home; Editing by David Evans)