(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Andy Home
LONDON, April 19 Copper's bull momentum from the
start of the year is fading as the disruption premium from
supply hits at the world's two largest mines unwinds and broader
risk-off turbulence also joins the mix.
Three-month copper on the London Metal Exchange
(LME) slid through $5,600 on Tuesday to hit $5,568.50 a tonne,
its lowest level since January. And though it staged a small
bounce on Wednesday morning, at $5,630 copper's year-to-date
gain stands at a little more than 2 percent, having been up
almost 11 percent in February.
On the supply side, a strike at Escondida in Chile has
ended, albeit after a longer than expected 43 days, while a
temporary compromise on export shipments should allow the
Grasberg mine in Indonesia to ramp up towards more normal
There is no shortage of potential further flashpoints in the
supply chain, but for now copper is drifting.
Unsurprisingly, the weaker tone in pricing has seen a
significant tempering of fund long positioning in the market.
What's curious, though, is that funds remain as committed as
they are, particularly on the CME's copper contract.
Has CME tapped a whole new source of managed money? Or is it
part of a bigger rotation of funds into the commodity sector? Or
maybe a bit of both?
Graphic on money manager positioning on the CME copper
Graphic on money manager positioning on the LME copper
The latest Commitments of Traders Report (COTR), covering
trading to April 11, showed funds holding a net long position of
55,512 lots on the CME's copper contract.
That's a sharp reduction from the peak of 101,139 contracts
registered in the last week of January. Expressed in terms of
open interest, funds have trimmed net long positioning from
almost 35 percent to 19 percent over the same time frame.
In broad terms the same unwinding of speculative length has
played out in the London market.
The LME's own COTR shows funds net long at 58,593 contracts
as of April 7, down from a peak of 80,478 contracts in
None of which is surprising, given that the money manager
category in both reports captures the Commodities Trading
Advisor (CTA) community, large parts of which use
This means that positioning often tends to follow price
evolution. A period of price drift, such as seen over the past
few weeks, will tend to translate into fewer longs and more
What is surprising, though, is that funds are still as long
as they are in both markets.
Strip out the past six months and that LME long position
would be the largest since the exchange started publishing its
reports in 2014.
The historical comparison is even more telling when it comes
to the CME because the U.S. COTR has a much longer history.
Ignoring the past few months, the current net length of 55,512
lots dwarfs anything seen in the past.
Prior to the fourth quarter of 2016 the highest collective
net long position had been 48,994 lots in July 2014, when copper
was trading either side of the $7,000 level.
To an extent, funds' commitment to copper is part of a
broader pattern of re-engagement with the commodities sector.
LME aluminium, for example, is a current favourite of money
managers, with net length higher than copper in both outright
size (197,857 contracts) and relative to open interest (21
percent), as of April 7.
As with copper, there is an evolving story to buy into as
the market tries to work out the impact on aluminium production
of China's increasingly draconian environmental controls.
But beyond specific narratives, there does seem to be a
broader rotation of fund money into commodities as correlations
with other asset classes break down and benchmark commodity
indices return to positive territory after several years of
Goldman Sachs, for example, notes that its "2017 top trading
recommendation", being long the GSCI commodity index, is showing
a return of about 7 percent. The bank retains its overweight
commodities stance on a three-month and 12-month time horizon.
("Commodity Watch: Patience is working but reflation requires
time", April 12, 2017).
Source UK Services, meanwhile, claims that its
exchange-traded fund (ETF) tracking the Bloomberg Commodity
Index has taken in $1 billion since its launch in January,
making it the "most successful ETF launch in the past five
Analysts at Citi estimate that cumulative inflows to the
commodities sector totalled about $8 billion in the first
quarter, albeit with a significant part of that flowing into
But if funds are indeed returning to commodity markets,
either they are doing so with a degree of enthusiasm not
hitherto seen in the CME copper contract or there are simply
more of them.
It's noticeable that rising money manager positioning on the
CME has coincided with a steady increase in activity.
CME copper volumes, futures and options combined, surged by
27 percent last year and a further 25 percent in the first
quarter of 2017.
Futures open interest surpassed 300,000 contracts for the
first time on Feb. 13 and has been running above 200,000
contracts since October last year.
It is evident the exchange has been winning more copper
business and, by inference, a lot of it has come from the fund
But which fund community?
Only the CME itself will know the answer to that question,
but the general perception is that its copper contract is
drawing in new Asian players, including an element of Chinese
Which itself is interesting since the one market not to show
any signs of speculative length is the Shanghai Futures
Exchange. Copper volumes and open interest were down 41 percent
and 32 percent respectively in the first quarter and recent
patterns suggest, if anything, that speculative players are
increasing short positions.
Copper is in a state of flux right now, with prices caught
between competing bear and bull drivers.
But it seems that fund participation in the copper market is
also in a state of flux, with the rise in length on the CME
suggesting something more than just cyclical rotation of
Whether the new money obeys the same rules as the old money
remains to be seen, but it injects a whole new layer of
uncertainty into an already highly uncertain pricing outlook.
(Editing by David Goodman)