Funds exit copper market as global storm clouds gather

*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’s been a partial bounce from Monday’s low point to a current $6,565 but copper has now fallen 10% 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 last month from 77,740 contracts to just 22,061. 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 impact global growth, copper’s specific concern is how Chinese growth will be affected. China remains the core driver of copper usage thanks to its massive 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 indices weakening.

Beijing, it seems, is worried too. It has cut its reserve ratio for some banks and was yesterday said to be supporting the yuan in currency markets. And all this before US tariffs on $34bn of Chinese goods kick in on July 6. 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 yesterday, 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 a massive 125,376 contracts in September last year. It was a bullish commitment that dwarfed anything seen 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.

Sources and photo-credits:  Andy Home, a columnist for Reuters, Gulf Times