May 11, 2022

Column: Funds drop it on copper stock poker game: Andy Home

LONDON, Dec 13 (Reuters) – Fund managers appear to have closed their copper trading books early this year.

Speculative positioning in the London Metal Exchange (LME) and CME copper contracts has fallen sharply since frenetic trading in October, which saw the LME metal climb to $10,452.50 per tonne over three months amid unprecedented turbulence.

The market has since calmed down. The premium for spot copper, which exploded to $1,103.50 a tonne before the LME intervened to limit the carryover, closed flat on Friday.

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The three-month price spent the first half of December trading languidly either side of the $9,500 level, the last at $9,498 a tonne.

The LME inventory has risen from the extreme lows seen in October, but there are still no signs of threatened massive shipments from Chinese producers.

Was it a bluff? Or is the metal on a slow boat from Shanghai?

This copper stocks poker game may not be over yet, but the added uncertainty has persuaded the funds to fold their cards and walk away from copper for the rest of the year.

Fund managers closed their copper books early this year

CUTTING LENGTH

Fund managers are still collectively long in the CME copper market, but the bullish positioning at 13,945 contracts is close to the year low of 12,956 recorded in August.

Outright long positioning was reduced from 82,538 contracts in October to 50,045, the lowest level since the second quarter of last year as the world was still recovering from the first hit of COVID-19.

Short positioning remains historically subdued at 36,100 contracts, with funds obviously still reluctant to bet against copper, even at these high price levels.

It should be noted that open interest in the CME copper contract, which has a higher speculative profile than the LME product, has imploded since October and is now also back to levels last seen in the first half of 2020.

LME open interest held up better, but funds also exited the London market, with the collective net long position falling from 39,577 lots at the height of the October turmoil to 28,154 according to the latest Trader Commitments report. .

Broker LME Marex, which uses its own methodology to track fund positioning, believes the fund sell-off has been even larger, rating speculative positioning in the London copper market as flat to small net short.

The overall picture, however, is the same.

Trading in copper and base metals “has become highly illiquid, with the sharp reduction in risk reflected in the very light positioning,” Marex noted in Monday’s daily report.

Interest in CME copper falls back to Q2 2020 levels

SQUEEZE, BUT WHAT HAPPENED?

There is a lot of uncertainty clouding the big picture for copper next year. Take your pick from China’s struggling real estate sector, US interest rates or the Omicron variant.

But the fierce October pressure also clouded the copper micro-waters.

Chinese copper smelters have signaled plans to deliver metal against LME pressure, which they did at a time of LME tightening. LME time spreads have since obligingly collapsed.

The only problem is that there is no sign yet of Chinese copper heading into the LME.

Chinese exports totaled just 11,200 tonnes in October, the weakest monthly print since the middle of last year.

The preliminary November figures did not include exports, but they showed an acceleration in imports, which is counterintuitive if China has enough copper to ship it to the LME.

There was little evidence of Chinese exports in LME stock movements.

Core stocks hit a low of 74,225 tonnes last week and have since risen to 84,450 tonnes. More importantly, available open tonnage has increased from just 14,150 tonnes in October to 80,350 tonnes currently.

However, the copper sucked into the LME system by October’s abnormal cash bounty largely arrived at European and US venues.

Deliveries under LME mandate totaled 56,575 tonnes since early November, of which 27,675 tonnes entered Hamburg and Rotterdam and 17,525 tonnes entered New Orleans and Baltimore.

Arrivals in South Korea and Taiwan, two obvious shipping destinations for Chinese exports, totaled just 7,875 tons and 2,350 tons respectively.

It is entirely possible that constraints on shipping capacity have slowed the export response, but the lack of significant inflows to LME sites in Asia has led to speculation that collapsing time gaps LME may have been the result of a financial rather than a physical settlement.

The threat of large volumes of Chinese shipments still looms, however, and there is a sense of suspended animation around the price of copper until things become clearer.

Global copper stocks on stock markets hit their lowest level since 2008

LOW COVER

The elimination of LME inventories ahead of the October chaos and the limited nature of the rebuilding that followed leave the copper market vulnerable to further inventory shocks.

Global equity stocks, including those held in the warehouses of the CME and the Shanghai Futures Exchange, ended November at 173,713 tonnes, the lowest month-end tally since 2008.

There’s not much in the shadows outside the LME’s mandate either – just 20,702 tonnes at the end of October, the lowest since the exchange began publishing this monthly information in February last year.

Copper looks set to enter 2021 with the weakest visible inventory coverage in a decade.

Unless, of course, resupply is on the way from China. But until the market finds out, the funds seem to have decided that the safest way to play this particular poker game is to quit it.

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Editing by Jan Harvey

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