(The opinions expressed here are those of the author, a columnist for Reuters.)
By Andy Home
LONDON, Feb 4 (Reuters) - It’s an old market truism that prices never move in straight lines.
Just ask an oil trader, who may well be suffering from whiplash after the ferocious 18-percent rally over the last three days.
Oil’s prior capitulation was one of the many bear factors behind copper’s own price implosion in the middle of last month. And oil’s subsequent bounce seems at the very least to have helped avert more downside in the copper market.
London Metal Exchange (LME) benchmark three-month copper is currently trading around $5,675 per tonne having clawed its way back up from last week’s low of $5,339.50.
Is there potential for a stronger oil-like correction in the copper market? Much depends on the size and nature of the collective short positions initiated by bears on the Shanghai and London markets last month.
While there are signs of a partial bear retreat in Shanghai, the positioning landscape is a lot murkier on the London Metal Exchange (LME).
Which is a shame because tracking the bears on the LME is not just an academic question. There remains a dominant long position holder, for whom bear hunting may be more than just a bit of statistical sport.
The bear attack on the copper market started, it is now generally agreed, in China with several hedge funds turning their considerable fire power on the Shanghai Futures Exchange (SHFE) copper contract.
The scale of that attack is clear from the first of the two charts below, which shows front-month Shanghai copper together with total market volume and open interest in a historical context.
Open interest hit an all-time record high, while volumes surged to their second highest level ever.
The only comparable instances of such explosive trading activity took place in April 2013 and March 2014. Both coincided with sharp copper sell-offs, which raises the interesting question of whether it was a case of third time lucky for Chinese copper bears.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on long-term price, volumes and OI on Shanghai copper: link.reuters.com/rah93w Graphic on short-term price, volumes and OI on Shanghai copper: link.reuters.com/tah93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
The second of the two charts shows the most active Shanghai contract, again with total market volume and open interest, over a shorter time frame.
Two things are worth noting.
First, the peak in open interest came on Jan. 30 in what looks like a second-wave bear attack.
And secondly, open interest has since fallen sharply as the price has bounced off its lows.
The inference for analysts such as Leon Westgate of Standard Bank is that “Chinese copper speculators are now heading for the exit”. (Commodities Strategy, Feb. 3, 2015).
Or at least some of them.
Because open interest is still extraordinarily high, suggesting it is only the late-comers who are now retreating. There is evidently the potential for a much bigger bear exit.
That said, the original attackers are in all likelihood sitting on positions significantly higher than the current price action, biding their time.
So too, it seems, is the dominant long position holder on the LME copper contract. It has been a feature of the exchange’s market reports for many months and has not yet thrown in the towel.
So where are the London bears?
Elusive, if you go by the LME’s Commitment of Traders Report.
The managed money category of the LME's report, launched in July of last year, is now widely followed by analysts for what is says about fund positioning. ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Graphic on LME copper and money manager net positioning: link.reuters.com/meh93w ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
And unsurprisingly the net money manager long on the copper contract has fallen with the price action, from 25,215 contracts at the end of December to a Jan 23 low of 7,530 lots. As of last Friday it stood at 11,811 lots.
What is surprising, though, is that “funds” are still net long at all, given that copper has hit lows not seen since 2009.
There’s the nagging suspicion that some players are lying hidden in some of the report’s other categories. Or even that they are not there at all, if they have bilateral trade agreements with LME brokers who merely report their own net positioning.
One broker, Marex Spectron, publishes its own longer-running set of positioning estimates and its latest take is that “speculative positioning” in LME copper totalled 130,000 lots at the end of last week, equivalent to a massive 76 percent of open interest.
Moreover, while the LME’s report suggests some short-covering over the course of last week, Marex’ figures point in the opposite direction with an increase of 9,500 lots.
Quite evidently, London copper’s potential for a sharper bounce depends on which bear positioning map you choose. The difference between the two is extremely stark.
One thing that isn’t in doubt in London, though, is the presence of that dominant long position holder despite the price slump and the arrival of almost 80,000 tonnes of metal into LME warehouses since the start of the year.
The latest exchange report <0#LME-WHL> shows it still holding between 50 and 80 percent of available LME copper stocks.
The front end of the forward curve remains accordingly in backwardation, even if the benchmark cash-to-three-months period CMCU0-3 has softened to around $30 backwardation from over $80 at one stage in mid-January.
Moreover, there is an intriguing stand-off between three longs and three shorts on the prime February prompt date <0#LME-FBR>.
One of those longs is a big one, accounting for 30-40 percent of open interest. That’s equivalent to almost 370,000 tonnes at the higher end of that range.
The timing of the looming showdown is also significant. The LME’s arcane prompt date system means that “third-Wednesday” February will actually trade on Monday, Feb 17, just before China shuts up shop for its Lunar New Year holidays.
Will China’s bears retreat further before then? Or go on the attack again?
Time will tell but this bear-bull stand-off in the copper market hasn’t yet played out. (Editing by William Hardy)