Column: Bearish bottoms flex muscles on copper as macro outlook darkens

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LONDON, May 10 (Reuters) – Hedge funds are turning increasingly bearish on the copper market as mounting evidence shows global manufacturing activity is beginning to stagnate.

Bears now outnumber bulls on the CME copper contract for the first time since May 2020, when the price of copper was just beginning to recover from the first wave of COVID-19 lockdowns.

Lockdowns are again in focus as China’s zero-COVID lockdown policy results in outsourcing of factory activity.

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China is the world’s largest user of copper, which is bad news for demand. Worse still, the simultaneous loss of manufacturing momentum in Europe and the United States, while the war in Ukraine exacerbates supply chain problems and dampens consumer confidence. Read more

Add to that the 50 basis point hike in US Federal Reserve interest rates and the resurgence of the dollar and the outlook for copper suddenly looks much less rosy than it did a few weeks ago.

Fund managers have given copper a big boost over the past year with prices too high to chase but a market too tight to risk shorting.

Macro fears are now outweighing micro supply fears and hedge funds are recommitting to copper in the near term.

Fund manager positioning on CME copper

BECOMING NEGATIVE

Fund managers started building short positions in the CME copper contract about a month ago and that collective bearish bet has since grown rapidly to 64,428 contracts.

Fund managers haven’t been so negative on copper’s outlook since the first coronavirus hit demand and prices in early 2020.

Silver has also been taken off the table on the long side, with outright long fund positions slipping from 76,837 contracts a month ago to 55,615.

The combined effect is a shift in net positioning to the sell side of 8,813 contracts.

It’s worth recalling that the latest Trader Commitments report shows the positioning landscape as of the close of business last Tuesday (May 3).

Copper has since fallen, with the three-month London Metal Exchange (LME) metal hitting a seven-month low of $9,139 a tonne on Monday and last trading at $9,356.

The breakout of the previous trading range will itself have generated a longer sell-off and further selling from systematic funds.

LME Copper and Chinese Purchasing Managers Indices

CHINESE FACTORY ACTIVITY COOLS

Shanghai remains in lockdown and restrictions have been tightened in Beijing as China continues its zero-COVID approach to containing the virus. Read more

Several other cities are experiencing varying degrees of quarantine disruption, reducing mobility, transportation and productivity.

Factory activity slumped in April, with the official and Caixin manufacturing purchasing managers’ indices slipping further into contractionary territory.

The official Purchasing Managers’ Index (PMI) for the manufacturing sector fell to 47.4 in April, its lowest level since February 2020, the peak of China’s first coronavirus lockdowns. Read more

The Caixin PMI fell even harder to 46.0, indicating the pressures on the country’s small and medium operators.

The Chinese government has promised to speed up infrastructure projects and tackle logistics bottlenecks to spur growth. Read more

But the Politburo, chaired by President Xi Jinping, has also doubled down on its lockdown policy. The country should “unrelentingly adhere to the general policy of ‘dynamic cleaning’ and resolutely fight against all words and acts that distort, doubt and deny (the government’s) anti-epidemic policies and policies”, according to Xi’s statement relayed by state media.

It is difficult for copper to escape China’s economic trajectory, as the country’s imports shape the market landscape.

With Russia’s “special operation” in Ukraine rapidly dampening the confidence of European manufacturers and consumers, the immediate outlook for copper demand is darkening.

The International Copper Study Group (ICSG) has just revised down its forecast for utilization growth this year from 2.1% to 1.9% to reflect “the weakening of the global economic outlook”.

This is one of the reasons why the Group expects the global copper market to record a supply surplus of 142,000 tonnes this year.

MACRO TAKES OVER MICRO

Funds have re-adopted copper as a gauge of global growth and recent price weakness has been accompanied by a sell-off in other risky assets.

For now, the still unpredictable microdynamics of copper are neglected.

Copper had to be limited by the LME as recently as October, as available trading stocks ran out to just 14,150 tonnes and time spreads ran wild.

The LME inventory has since been rebuilt to 167,825 tonnes with an available tonnage of 113,650 tonnes.

Time spreads, however, have recently tightened again, with the spot metal imposing a three-month delivery premium of $16.00 a tonne as of Tuesday morning.

This suggests that supply chain issues and availability may have improved but not fully recovered.

There also remains a major question mark over the status of Russian copper. It is not currently sanctioned and the LME has said it will allow good delivery until that changes.

However, signs of sanctions are starting to seep into the metals sector, with the European Union banning imports of Russian lead and the UK raising tariffs on Russian platinum and palladium.

If the economic retaliation were to extend to Russian copper exports, it could still generate a supply shock.

This is a micro-risk that an increasingly bearish fund community seems willing to risk as it sells copper as an indicator of global growth.

The opinions expressed here are those of the author, columnist for Reuters.

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Written by Andy Home; Editing by Susan Fenton

Our standards: The Thomson Reuters Trust Principles.

The opinions expressed are those of the author. They do not reflect the views of Reuters News, which is committed to integrity, independence and non-partisanship by principles of trust.

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