Supercycles take time to develop and will inevitably span periods of relatively soft fundamentals and price consolidation.
Copper is currently a case in point, according to Goldman Sachs, which pronounced itself a commodities superbull late last year.
The investment bank maintains its view that “copper stands at the beginning of a multiyear bull market” with the current pause reflecting temporary “investor anxiety” and “liquidation bouts.”
That “anxiety” has seen funds cut sharply their bull copper bets over the past couple of weeks, even as the London Metal Exchange (LME) price has been swinging around the US$10,000-per tonne level after hitting its all-time high of US$10,747.50 on May 10.
The main source of “fundamental consternation,” Goldman concedes, is China, which until now has been the driver of copper’s pandemic recovery rally but which shows every sign of being glutted with metal after last year’s record imports.
That is feeding a strong counternarrative that the copper price has peaked for now with the rest of the world not yet ready to pick up China’s supercycle baton.
FUNDS PLAY IT SAFE
Funds have evidently decided to take some money off the table and wait and see which narrative turns out to be correct.
Money managers have reduced their net long positioning on the CME copper contract by almost 30 per cent in the space of three weeks.
The collective bull commitment of 33,931 contracts is the weakest it’s been since July last year, when the copper rally was still in its formative stage.
The shift in the investment landscape has been all about profit-taking, funds slashing outright longs that had been accumulated on copper’s April march up towards the US$10,000 level.
Few are yet prepared to take a fully contrarian view with outright investor short positioning creeping higher but still small by historical standards.
A good deal of the investment fizz has also left the London market, where fund net long positioning has fallen to 31,695 contracts, the lowest collective bull bet since October last year.
LME broker Marex Spectron uses its own methodology to assess speculative positioning but agrees with the trend, estimating the investment long has fallen to 28 per cent of open interest from 62 per cent in February, when it was the highest since 2004.
CHINA SLOWDOWN
Chinese speculators remain unenthused by copper and that has nothing to do with the government’s increasingly strident warnings about commodity price inflation.
Volumes and market open interest on the Shanghai Futures Exchange copper contract peaked in February and April respectively. Trading activity remains subdued. Open interest has rebuilt a little over recent days but at 339,082 contracts is a long way off its April peak of 394,614 contracts.
China’s army of retail traders evidently prefer the roller coaster that is the iron ore and steel complex right now. The ferrous market has a low price entry point relative to copper and, from a Chinese perspective, a stronger short-term bull narrative of domestic production constraint. It is also, not coincidentally, where the Chinese government is making the loudest noises about speculative excess.
Compare and contrast with the local copper market, where the Yangshan premium, a closely-watched indicator of import demand, has slumped to a multi-year low of US$32 per tonne, according to Shanghai Metal Market.
That’s not surprising given the strength of imports since the start of China’s COVID-19 recovery early last year. Net imports of refined copper rose by 1.2 million tonnes to 4.4 million in 2020 and remained robust through the first quarter of 2021.
Now, however, the country is showing every sign of entering a de-stocking phase which will coincide with an expected broader slowdown as China’s policy makers wind in the stimulus cash.
Chinese investors don’t seem enthused by the short-term headwinds facing the local copper market and Western fund managers seem to be expressing the same caution.
SUPERCYCLE OR OLD CYCLE?
What Goldman Sachs terms “fundamental consternation” boils down to the question as to whether the bank’s superbull case is correct or whether copper is trapped in the same old China cycle.
The narrative is still being contested by the likes of UBS, which expects the price to “moderate over the next 12 months” as the restocking and pent-up demand impetus fades and copper supply bounces in response to higher prices.
“We do not see structural copper shortages in the next two to three years,” according to UBS.
Goldman couldn’t disagree more, It expects a “substantial” supply deficit in the second half of this year and is holding a 12-month target of US$11,500 per tonne.
Doctor Copper has seemingly come to a fork in the narrative road.
Superbulls such as Goldman see copper breaking out of its previous China dependency as the rest of the world embarks on a metals-heavy green industrial recovery strategy.
Bears argue that copper won’t escape the gravitational pull of a slowdown in the world’s largest consumer.
With the physical copper market undoubtedly hitting a soft patch thanks to China, the evidence can be argued either way.
While the jury remains out, fund managers have evidently decided that the safest bet is not to bet.
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