‘Doctor’ Copper’s health may reveal coming global malaise

If you’re one of those people who believe that “Doctor” Copper is a lightning rod for the state of the global economy, then you should be worried.

London Metal Exchange (LME) copper for three-month delivery has this week touched $6,519 per tonne, its lowest level since December 2017.

There has been a partial bounce from Monday’s low point to a current $6,565 but copper has now fallen 10 per cent in less than a month and the band of support around December’s low of $6,507.50 is widely expected to come under renewed scrutiny sooner rather than later.

Funds have been slashing their exposure to copper. Net length on the CME’s copper contract has collapsed over the space of the past month from 77,740 contracts to just 22,061.

And it’s not just copper. Money managers were net sellers of 19 out of 24 major traded commodities last week, according to Saxo Bank.

Tariffs and escalating trade tensions have flipped the investor risk switch to off. Copper, however, is particularly vulnerable because of its exposure to the Chinese economy, already showing signs of losing momentum and now apparently battening down the hatches for a trade stand-off with the United States.

It’s this sensitivity to a deteriorating macro picture that is overwhelming a still finely balanced dynamic in the copper market itself.

While there is broader market concern about how the escalating trade tensions will affect global growth, copper’s specific concern is how Chinese growth will be affected.

China remains the core driver of copper usage thanks to its huge industrial and construction sectors.

Copper bulls have been growing increasingly worried about signs of a slowdown in China’s own manufacturing engine, with fixed asset investment and purchasing manager indexes weakening.

Beijing, it seems, is also worried. It has cut its reserve ratio for some banks and was on Tuesday said to be supporting the yuan in currency markets.

And all this before US tariffs on $34 billion of Chinese goods kick in on Friday.

Fear about what all this means for future copper demand is being compounded by the meltdown in Chinese stock markets.

You know a Chinese market is in trouble when state-controlled media use words such as “irrational overreaction” and warn investors not to panic.

The bluechip CSI300 Index and the Shanghai Composite Index staged a bounce on Tuesday, but after days of relentless selling it may yet prove to be of the dead cat variety.

Large moves in one part of the Chinese financial ecosystem often have knock-on effects in others, such as industrial metal markets, which can in turn feed back into international markets.

It may already be happening. Some of the money that has left the copper market in recent weeks and months may well have been Chinese.

But if copper is now reacting to global price drivers, its own had left it looking increasingly vulnerable even before the latest sell-off.

Fund net long positioning in the CME copper market reached an enormous 125,376 contracts in September last year. It was a bullish commitment that dwarfed anything in the past.

The copper price was on a charge, punching up from below $5,500 to a December peak just shy of $7,250 per tonne. It made a more recent high of $7,348 at the start of June, but the broader trend has been one of a stalled rally and a steady, unwinding of investor exposure.

In large part this is because coming into 2018 there were high expectations that the sheer number of expiring labour contracts at key mines in South America would translate into at least a couple of strikes and supply hits.

Six months into the year, however, and not one major mine has experienced a walk-out.

Indeed, global mined copper production surged 7 per cent in the first three months of this year, a remarkable rate of growth for a metal associated with chronic supply disruption. But it’s taking place farther down the supply chain.

The closure, possibly permanently, of the giant Tuticorin smelter in India will force a major redirection of copper flows in the Asian markets.

China’s crackdown on scrap metal imports has interrupted the flow of scrap copper from its largest supplier, the US. But neither disruptor is diminishing the amount of copper coming out of the ground, which is what analysts count in their supply-demand forecasts.

That sense of statistical surplus, moreover, has been reinforced by signs of a well-supplied market.

Exchange stocks of refined copper totalled 757,000 tonnes at the end of last month, up 214,000 tonnes since the start of the year and up 154,000 tonnes on June 2017.

There is another 500,000 tonnes sitting in China’s bonded warehouse zones, according to Shanghai Metal Market.

Investors in copper love a deficit narrative and although there is a broad analyst consensus that it is coming down the line, it’s quite evidently not here yet.

Investor warmth to copper was already waning before sentiment turned outright negative over the past couple of weeks.

The irony is that copper’s price slide is taking place just as the market awaits the outcome of one particularly important set of labour negotiations.

The Escondida mine in Chile is the world’s largest, and a 44-day strike there last year took more than 200,000 tonnes of copper out of the supply equation.

The union has been making conciliatory noises, but with a July 24 deadline looming, there has been little communication from either side of the bargaining table.

Behind Escondida comes Codelco. The state-owned Chilean producer has multiple labour contract expiries later this year and the division with which it reached an early settlement, Chuquicamata, is now up in arms about possible redundancies.

However, the “strike premium” has been fully unwound from the copper price even before some of the most obvious flashpoints have been negotiated.

That’s because macro is trumping micro – for the moment at least. Not all the bulls have left the market. There is still one, sitting between 40 and 50 per cent of the LME copper stocks and, quite possibly, on the time spreads. The London copper curve has in recent weeks tightened to levels not reached in a year.

It’s a warning sign that copper’s micro fortunes may yet bite the macro bears.

Investor warmth to copper was already waning before sentiment turned outright negative over the past couple of weeks