(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, May 15 (Reuters) - The copper market this year has been defined by a war of attrition between bulls and bears.
The bears won the first battle back in January, when they forced the London Metal Exchange (LME) three-month price down to a five-year low of $5,339.50 per tonne.
Since then, however, the copper price has clawed its way back to a high last week of $6,481, recovering all the ground lost in that early bear blitz.
LME copper is this morning trading around $6,365 with the two sides locked in an uneasy stand-off.
Chinese funds, which played a high-profile role in that January bear attack, appear to be rebuilding short positions.
Meanwhile, in London the bull controlling the nearby spreads shows no signs of giving up either.
The market itself is generating sufficiently mixed signals to provide both sides with ammunition, suggesting this struggle for supremacy is far from over.
Chinese funds, particularly the wonderfully named Shanghai Chaos fund, were quickly identified as the perpetrators of that January bear raid.
But then the timing of the Jan. 14 slump, when LME copper plunged $250 when most London traders were still tucked up in their beds, left little doubt as to where the selling momentum was coming from. The Shanghai Futures Exchange (SHFE) copper contracts had just gone limit down.
Moreover, the SHFE conveniently publishes a list of the top twenty long and short positions by broker.
And second on the list of copper short position-holders was Chaos Ternary Futures, a broker majority owned by the Chaos investment fund. Yongan Futures, which is associated with another big fund player, Dunhe Investment, was the largest short position holder at the time.
To what extent these two brokers' positioning reflected that of the two funds is a moot but ultimately unknowable question.
However, the market has been tracking those SHFE open interest reports ever since.
And right now Chaos Ternary Futures is the largest short position holder on the most liquid July copper contract.
Indeed, the position has grown significantly to 20,642 lots from just under 9,000 lots at the height of the January sell-off.
The read-through from broker to fund is no less problematic than it was back then but at the very least the size of the positioning suggests a scaling-up of short bets on the Shanghai market.
Meanwhile, the London market remains beholden to the dominant long straddling the front part of the curve.
The latest LME market reports, denoting the positioning landscape at the close of business on Wednesday, show one entity holding between 50 and 80 percent of non-cancelled LME stocks.
This dominant long has been a feature of the London copper market for so many months that it's almost become a permanent part of the spread structure in London.
However, as with the Shanghai positioning reports, appearances might be deceptive.
Late last year the London "Street" was convinced it knew the identity of the bull lurking in the nearby spreads.
If it's still there, it attests to a remarkable level of commitment in the face of adversity. Emphasis on the word "if" in that sentence because there were whispers on the "Street" that the position got flipped to another player at the height of the January storm.
The key takeaway, as with the SHFE positioning landscape, is not so much the identity of the dominant long but the very fact that there is a dominant long.
And while it's there, the London spread structure will reflect its presence.
The front part of the curve has eased considerably over the last couple of months to the point that the benchmark cash-to-three-months period CMCU0-3 flipped into contango in April.
But the tension has never fully gone away and that spread is once again backwardated, albeit at a relatively benign $4.75 as of Thursday's close.
****************************************************** LME copper money manager positioning: link.reuters.com/cen74w ******************************************************
So, there we have it, a dominant bull long in London and a large short position in Shanghai with the rest of the market oscillating between the two.
The LME's Commitments of Traders Report, an admittedly blurred lens through which to pinpoint speculative flows, shows money managers tentatively rebuilding net length since January.
As of May 8 the net long position stood at 8.2 percent of open interest, up from a low of 1.6 percent on Jan. 23.
What will resolve the stand-off?
Fundamental signals from the copper market are hopelessly confused right now, mainly because of the uncertainty surrounding the current state of the Chinese market, the single most important driver of copper usage.
Chinese demand looks weaker than it's been for a long time but just how weak is the subject of much heated debate, the picture being further obscured by the normal seasonal uptick in manufacturing activity during the second quarter.
Absent a consensus on the market's dynamics, visible stock trends may be the shorter-term determinant of the battle.
LME stocks surged over the first quarter of this year but have since shown signs of flattening out.
More pertinently given the presence of that dominant long, the pace of cancellations has picked up strongly over the last couple of weeks.
The amount of tonnage in the LME system awaiting physical load-out is now at 126,625 tonnes, representing 37.5 percent of the total inventory.
On the flip side, open tonnage at 211,375 tonnes is back at early-January levels.
SHFE stocks, meanwhile, are tumbling fast. At a current 173,157 tonnes they are still up on the start of January but most of the build seen around the Chinese New Year has been worked off.
Evidently, if both trends continue, it will be to the advantage of the bulls over the bears.
But as with everything else in this bull-bear showdown, that could be a big "if".
Right now, the only thing for sure is neither side is yielding and it seems only a matter of time before the current stand-off reverts to open warfare.
Editing by Susan Thomas