LONDON (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 2011.
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: tmsnrt.rs/2LJuhzI
Graphic on LME copper vs Yuan: 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 tensions.
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 tariffs on”.
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: tmsnrt.rs/2LGn0kp
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 price collapse.
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 below $5,000.
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 rally”.
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.
The opinions expressed here are those of the author, a columnist for Reuters.
Editing by Jan Harvey
Our Standards: The Thomson Reuters Trust Principles.