Dr Copper’s gloomy message is being amplified by new fund friends: Andy Home
Typical, isn’t it?
Copper bulls have been waiting all year for a strike and along come three potential Chilean flashpoints in the space of a week.
The main union at the Caserones mine is threatening to walk off the job on Tuesday if government mediation fails to generate a breakthrough in deadlocked talks.
Unions at Escondida have rejected an offer on a new labour contract, raising the prospect of another walk-out after last year’s 44-day strike at what is the world’s largest single copper mine. Meanwhile, workers at Chilean state copper producer Codelco’s Chuquicamata division staged protests last week in a long-simmering dispute over restructuring plans.
None of which helped the copper price, which closed Friday down on the week and has on Monday morning slipped further towards the $6,000 per tonne technical cliff-edge.
London Metal Exchange (LME) three-month metal was last trading around $6,100.
Doctor Copper, it seems, is far more worried about the potential hit to demand resulting from the escalating trade dispute between the United States and China.
But is he exaggerating the threat?
Copper bulls came into 2018 with high expectations of supply disruption from the multiple labour contract expiries at some of the world’s biggest mines.
The first half of the year, however, brought next to zero disruption from labour strife or anything else for that matter.
World copper mine output grew by six percent in January-April, according to the International Copper Study Group. This, by copper’s standards, is a remarkably strong supply performance.
So you’d think there would be some bullish price reaction to the current Chilean disputes covering around 1.4 million tonnes of annual production capacity.
But last week’s news flow did no more than pause a sell-off that began in the middle of June and which has seen copper slump by 18 percent from the highs above $7,300 per tonne.
Nor has the price drawn any comfort from bullish signals emanating from the physical market.
Global visible inventory has fallen for four consecutive months. In both June and July all three major exchanges – LME, CME and the Shanghai Futures Exchange (ShFE)- registered falls, which is a rare occurrence.
Physical metal continues to flow at a fast pace into China, the world’s largest buyer.
Imports of unwrought copper in June were up 15 percent on June 2017, while cumulative first-half 2018 imports rose by over 16 percent.
At other times, this would amount to a potent bullish cocktail.
Right now, though, none of it seems to count.
What’s moving the copper price downwards is the threat of future economic slowdown resulting from escalating trade tensions.
The Trump administration may have dialled down its stand-off with the European Union, for now at least, but it is ratcheting up the pressure on China.
The United States and China implemented tariffs on $34 billion worth of each other’s goods in July with tariffs on another $16 billion of trade expected imminently.
The United States is looking at yet another $200 billion worth of Chinese imports to target, while China has responded with its own proposed tariffs on 5,207 goods imported from the United States worth $60 billion. Neither side shows any sign of backing down. President Donald Trump tweets that import tariffs on Chinese goods are “working far better than anyone ever anticipated”.
Official Chinese media respond by accusing Trump of starring in his own “street fighter-style deceitful drama of extortion and blackmail”. The dollar is up, the yuan is down and Dr Copper is warning us that this could end up very badly. At one level he is right.
Copper’s fortunes are beholden first and foremost to the strength of demand in China. This was already looking questionable before the trade dispute took fire, meaning any tariff-related concerns are acting to amplify existing worries about a cyclical slowdown in the Chinese economy.
This is particularly evident in the Shanghai copper market.
Open interest on the Shanghai Futures Exchange (ShFE) contract has been sliding since March of this year as speculators left copper in search of more promising markets such as still-booming iron ore.
The latest sell-off has been accompanied by high volumes and open interest falling to its lowest level since 2017, suggesting that the last bulls, including the mega bull that was Gelin Dahua, have also thrown in the towel. As these structural positions get cleared out, trading has become increasingly beholden to the twists and turns of the trade dispute.
Buyers step in when the trade rhetoric softens only to reverse out when it ratchets up again.
Speculators elsewhere are using copper to express their negative macro views.
Funds have switched net positioning from mega long to mega short on the CME copper contract in superfast time.
The net money manager position stood at 77,740 contracts in the middle of June. As of the end of July it was net short to the tune of 26,350 contracts, a level not seen since September 2016.
Both the outright positioning levels and the speed of change are almost unprecedented.
That’s because fund capacity in the U.S. copper market has experienced a step-change over the last couple of years.
The bullish positioning seen over the course of 2017 broke all previous records. Even that mid-June position would have been an all-time record before the historical yardstick started changing towards the end of 2016. The identity of Dr. Copper’s new fund friends is a hotly-discussed topic in the market.
The best collective guess is that they are a combination of new systematic players joining the copper market and a spill-over of Chinese players looking for arbitrage opportunities.
The latter may have found another vehicle to trade a bear view of the Chinese economy, while the former are simply chasing the momentum of a falling price.
It remains to be seen whether together they are capable of accumulating the sort of record positions on the short side that they built on the long side last year.
However, the effect is to amplify any existing trend, which right now is firmly downwards.
Dr Copper may well be sounding a timely warning as to where the global manufacturing economy may be heading.
Source: Reuters (Andy Home; Editing by David Evans)