(Repeats July 23 story with no changes to the text)
* LME Index: https://tmsnrt.rs/2LJuhzI
* LME Copper vs Yuan: https://tmsnrt.rs/2LiQ1WU
* Fund Positioning on CME copper: https://tmsnrt.rs/2LGn0kp
By Andy Home
LONDON, July 23 (Reuters) – Doctor Copper has been having a
rough time over the last few weeks.
In London the price of copper for three-month delivery
fell through the $6,000 per tonne level last week for
the first time since July 2017.
The Wednesday low of $5,988 per tonne marked a near
19-percent price implosion from June’s high of $7,348.
Copper’s fall from grace has been part and parcel of a
broader collapse in industrial metal prices. The London Metal
Exchange (LME) Index, a composite of six base metals
contracts, has experienced its steepest monthly fall since late
Individual metallic narratives have been swamped by macro
fears about global growth, escalating trade tensions and
gyrating foreign exchange markets.
Funds have turned net sellers across the LME spectrum,
betting that things are only going to get worse.
There has, however, been a small bounce this morning and
contrarians have started to emerge, arguing the sell-off has
gone too far.
Graphic on LME Index: https://tmsnrt.rs/2LJuhzI
Graphic on LME copper vs Yuan: https://tmsnrt.rs/2LiQ1WU
PERFECT MACRO STORM
China is still the driver of industrial metal prices, and
signs of a loss of growth momentum in the world’s single largest
metals user formed the backdrop for the current blood-bath.
China bears can take their pick of factors, from a crackdown
on the shadow finance sector, slowing property investment or
sliding manufacturing indices.
These concerns have been around for many months.
As far back as January Goldman Sachs, a commodities
super-bull, was telling investors not to worry about the Chinese
property market. (“Metals Express: China property slowdown not a
2018 story”, Jan. 13, 2018).
Trade tensions between the United States and China have
simply served to stoke further such pre-existing fears.
Trade tensions between the United States and everyone else
raise the risk of a global hit on manufacturing growth, the
engine on which industrial metals run.
If Doctor Copper really has that degree in economics, he’s
telling us that a global recession may be on its way, a prospect
discussed by my colleague John Kemp in a column last week.
Adding a little extra spice to this bear cocktail has been
the strengthening of the dollar, always a headwind for
dollar-denominated commodities of any kind, and the simultaneous
weakening of the Chinese renminbi.
Analysts have been tracking the lock-step movement of the
copper price and the yuan during this rout.
The 10-day correlation has been near 90 percent, according
to ING’s Oliver Nugent, a degree of synchronization that “hasn’t
been seen since the yuan was first liberalised in mid-2016 and
the devaluation made a long (Shanghai) vs short CME copper
arbitrage the topical trade for shorting the yuan”. (“What can
stop the copper rout?”, July 20, 2018)
Much, if not everything, is going to depend on what happens
next in the U.S. Administration’s ratcheting up of trade
We’ve already had tariffs on imports of aluminium and steel,
the ripple effects of which are still running down those two
markets’ respective supply chains.
The European Union, Canada and Mexico are among the affected
countries that have retaliated.
We’ve had tariffs on $50 billion of Chinese imports and an
immediate like-for-like response from China.
That in turn has led to a new potential $200 billion list of
U.S. imports from China that might be hit.
If you’re losing track of who’s doing what to whom, this
FACTBOX will help:
And in the most recent escalation, President Donald Trump on
Friday threatened to impose tariffs on all $500 billion-plus
imports from China.
We’ve now arrived at what Guy Wolf, analyst at LME broker
Marex Spectron, terms “peak rhetoric”.
Trade tensions may have instilled heightened uncertainty
into all markets, not just metals, but Wolf argues that the
“positive aspect” of Trump’s latest rhetorical flourish is “we
no longer have any Chinese exports to worry about there being
This may be a “turning point in the psychology around this
situation of uncertainty”, according to Wolf, who has just
published a boldly contrarian market call. (“Base Metals Bull
Market: Time to re-engage”, July 23, 2018).
Graphic on money manager positioning on CME copper:
Marex’ big call is predicated not just on market psychology
but on its internal workings, particularly the current net
positioning of speculative money.
Fund selling has been the accelerant of the last month’s
One of the reasons copper has taken such a dramatic hit has
been the liquidation of a major fund position, held by Chinese
futures brokerage Gelin Dahua, in the Shanghai market.
Indeed, China’s last bull has now turned bear.
It now just one of many expressing their growing
macro-economic concerns by selling copper and other industrial
metals most exposed to potential global recession.
Fund managers held a significant, 77,740-contract, net long
position on the CME copper contract as recently as June.
As of last Friday they were collectively net short to the
tune of 23,723 contracts. That’s the largest short positioning
since September 2016, when the copper price was still bombed out
Fund selling is why zinc has fared even worse than copper.
LME zinc is now down by 23 percent on the start of 2018,
compared with copper’s 14-percent slide.
Money men started selling zinc several months ago, taking a
negative view of the metal’s fundamental drivers, most
specifically a feared supply response to recent high prices.
A deteriorating macro picture has simply added fuel to the
bear fires and Marex now estimates speculators are net short to
the tune of 29 percent of LME open interest, “a level not seen
since Nov. 2015, when the short peaked at 38 percent”.
“In terms of positioning, I think the levels of our
estimates in copper and zinc have very likely peaked,” Wolf
writes, adding: “It would require something very unusual for
this market not to turn around now.”
Fund short positioning is the “fuel for a sustainable
Quite evidently, Wolf’s is not a consensus view right now,
with the base metals complex still fragile and vulnerable to the
next presidential tweet and accompanying wave of fund selling.
But his report closes with the useful reminder that “the
time to bet on a bull market is when everyone else doubts it”.
That’s a trading adage that will never change. It’s only a
question of whether this is the time.
(Editing by Jan Harvey)