Macro gloom engulfs copper market
THE bears are out in force in the copper market.
Analysts at Citi recommend “accumulating a bearish position of any size” before a plunge in pricing, citing in particular the looming prospect of a recession in Europe.
Even commodities super-bull Goldman Sachs has slashed its short-term forecasts in the face of “deteriorating macro sentiment, weaker growth expectations and a stronger dollar”.
Funds are heeding the bear call, reducing long exposure in London and remaining net short on the Chicago Mercantile Exchange (CME) contract.
The London Metal Exchange (LME) threemonth copper price slid to a one-month low of US$7,510 (RM33,785.97) per tonne last week and at a current US$7,610 (RM34,235.85) is now down by 22% on the start of the year.
LME time-spreads, by contrast, have flared out again, highlighting the tension between the macro negativity and copper’s still robust micro dynamics.
Bulls in retreat
Money mangers have been net short of the CME copper contract since June.
That net short position contracted to 4,768 contracts at the end of August, when copper was staging what now looks like a dead-cat bounce.
Bear positioning flexed back out to 8,312 contracts at the close of business last Tuesday and is likely to have grown again as the price fell further over the course of the week.
These fluctuations look like short position management, particularly from algorithmic programmes adjusting to changes in price momentum.
Tellingly, there has been almost zero change in outright long positions in recent weeks. At 38,763 contracts, they have almost halved from their recent peak in April.
Similar fluctuations in short-term positioning are evident in the London market, where investment funds have retained a net long position but at a much reduced level.
Even after a late-august bounce to 18,790 contracts, net positioning is a long way off the February peak of 39,028.
Rather, the real stand-out from the LME’S Commitment of Traders Reports (COTR) is the steady bull retreat in the “other financial institutions” category, which captures pension and insurance funds.
These longer-term investors have been reducing their long exposure since the end of last year. The net position has fallen from over
31,000 contracts in November to just 840.
It’s worth noting that these “other” funds have never been net short of copper since the LME started publishing its COTR in the first quarter of 2018.
Demand fears trump supply fears
It says much about the current negativity surrounding copper that the LME price fell 5% last week despite more evidence of structural supply problems in Chile, the world’s largest producer.
The country’s copper production fell by 1.5% over the first half of 2022, according to the government’s statistical body Cochilco.
State-owned Codelco has cut its full-year production guidance and chairman Maximo Pacheco told the El Mercurio newspaper output would fall again next year and remain structurally challenged in the following
years due to slow execution of key investment projects.
At other times such comments might have been expected to generate a price bounce, but supply-side concerns are currently overshadowed by demand fears.
It’s not hard to see why.
China’s manufacturing sector is contracting under the weight of rolling lockdowns, extreme heat and power shortages in some provinces.
European factory activity, meanwhile, shrank for a second consecutive month in August and a cost-of-living crisis is now widely expected to translate into a full recession.
Doctor Copper with his honorary degree in global economic cycles is capturing this darkening demand landscape, albeit with a lot of help from bearish banks and fund managers.
Supply twist
Yet the copper market can’t yet escape its own physical dynamics.
If the fears about demand prove well founded, a supply glut may well be coming, but it’s not here yet.
LME inventories remain low, having failed to rebuild during what is normally a weak usage period over the northern hemisphere summer. The headline total of 108,450 tonnes includes 42,425 tonnes earmarked for physical load-out.
CME stocks have been sliding since April, while those registered with the Shanghai Futures Exchange touched a seven-month low last month.
Combined exchange inventories totalled just 196,000 tonnes at the end of August, down from 381,000 tonnes a year earlier.
LME time-spreads are signalling tight availability, the cash-to-three-months period shifting from contango in June and July to backwardation in August. The cash premium closed last week valued at US$58 (RM260.93) per tonne.
The title of Goldman Sachs’ Aug 22 research note, “Tightening into a Slowdown”, captures this growing divergence between micro and macro forces in the copper market.
The bank cut its three-month-horizon forecast from US$8,650 (RM38,914.60) to $6,700 (RM30,141.95) in July and warns of the potential for further outright price weakness.
But it also recommends a micro twist in the form of a long time-spread position to capture the disconnect between fears of demand slowdown and a physical supply-chain that it is still struggling to meet current demand.
Goldman remains a longer-term bull, expecting a copper price of US$14,000 (RM62,983.17) per tonne in 2024 and US$15,000 (RM67,481.97) per tonne in 2025.
But even the bank that proclaimed a new commodities super-cycle at the start of last year accepts that copper’s structural bull story has just hit the pause button. — Reuters