Copper’s future in the energy transition may be bright but it’s the problematic here and now that is weighing on fund managers’ minds.
Money manager positioning on the CME’s copper contract shifted back to a net long at the start of November for the first time since early May.
But the change in stance has been all about covering short positions into the recent price rally, which saw London Metal Exchange three-month copper power up to a five-month high of $8,618 per tonne on Friday.
Bulls remain conspicuous by their absence, waiting to see how Doctor Copper prices the confusing combination of Western recession and tentative recovery in China.
BEARS RETRACT THEIR CLAWS
Money managers reached peak negativity on copper’s prospects in July, when the cumulative CME short position stood at 65,962 contracts, the largest collective bear bet since COVID-19 first emerged in early 2020.
Soaring inflation, interest rates hikes, dollar strength and rolling lockdowns in China formed a heady bearish brew, with funds increasing their short commitment as London copper slumped from over $9,800 per tonne in June to a 20-month low of $6,955 in July.
The price has since rallied sharply, sentiment turning more positive as Chinese policy-makers ease some of the COVID-19 restrictions that have constrained the country’s economic activity.
The bounce has forced an unwind of fund short positions, which have more than halved to 31,177 contracts as of last Tuesday.
Money manager long positions, by contrast, have barely changed since May. They currently total a modest 47,128 contracts, compared with an April peak of 76,837.
The shifting fund landscape on the CME contract has been broadly mirrored in London.
Investment funds slashed their net long position from a high of 39,028 contracts in February to a two-year low of 4,123 in July, since when bullish bets have gyrated higher to 12,443.
Market participants captured by the LME’s “other financial” category - a mix of passive index and insurance money - turned net short of LME copper in September for the first time since the exchange started publishing its Commitments of Traders Report in January 2018.
The short flexed out to 2,717 contracts in October but positioning has since switched back to net long, albeit to the tune of a highly modest 1,911 contracts.
Bears have retracted their claws on both exchanges but there’s been no corresponding surge in bullish exuberance among fund managers.
RECOVERY AND RECESSION
Funds’ reticence to commit to copper is understandable given the market is trying to price two conflicting trends.
China’s shift away from its previous zero-tolerance approach to the Omicron variant should stimulate growth in a manufacturing sector which has been stuck in neutral for much of the year.
So too should the government’s 16-point plan to revitalize the foundering property sector and more promised green-energy infrastructure.
However, full manufacturing recovery remains dependent on full COVID-19 recovery, which may be delayed if looser quarantine rules translate into significantly more cases.
The return of Chinese support for industrial metal markets looks set to be a protracted two-steps-forward-one-step-back affair.
Meanwhile, Europe’s energy crisis is sending the region into recession, if it is not there already, with economists now also expecting a mild recession in the United States next year.
Copper’s fortunes will depend on whether the Western downturn plays out faster than the Chinese recovery.
Citi analysts think it will. The bank’s base case is “for substantial downside in base metal prices over the next 3-6 months.” Copper, according to Citi, is pricing in a demand recovery which “is unlikely to materialize.”
Macquarie Bank also “maintains its bearish outlook for next year,” expecting the copper price to bottom in the first or second quarters with a quarterly average low of $7,200 per tonne.
Goldman Sachs remains the contrarian bull voice, arguing the market is ignoring low inventories, particularly in China where economic recovery could trigger a major restocking exercise.
Judging by current positioning on both sides of the Atlantic, funds are unpersuaded either way, deciding the safest bet right now is no bet at all.
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