(The opinions expressed here are those of the author, a columnist for Reuters)
* CME Copper Fund Positioning: tmsnrt.rs/2Ede7jT
* LME Copper Stocks and Spreads: tmsnrt.rs/3ll1fZJ
LONDON, Aug 24 (Reuters) - Copper’s increasingly bullish optics are attracting the attention of fund managers.
Speculative positioning on the CME’s HG copper contract is at a two-year high.
Copper has already staged a super-charged rally off its COVID-19 first-quarter lows and CME copper is currently challenging the $3.00 per lb ($6,614 per tonne) level.
That’s one of those “big numbers” that is guaranteed to pique the interest of the automated trading programmes that play in the CME market.
But investors are starting to rethink more fundamentally a market that shows every sign of physical tightness despite the undoubted hit to demand from global lockdowns.
Exchange stocks of copper are low, particularly those on the London Metal Exchange (LME), where depleted inventory is causing time-spread volatility.
It doesn’t help that someone owns most of the available metal.
RIDING THE RALLY
Funds were net long of the CME contract to the tune of 60,974 contracts in the week to Aug. 18, according to the latest Commitments of Traders Report from the U.S. Commodity Futures Trading Commission (CFTC).
That’s the largest collective bull bet on higher prices since June 2018.
Fund managers have slashed short positions to just 23,503 contracts, the lowest since the fourth quarter of 2017, while building long positions to the highest level since early 2018.
The increased buy-in to copper’s post-coronavirus bounce has to some extent been self-fulfilling as technical funds have simply accumulated positions into a strongly rising market.
Price and positioning are now at a critical phase with the technical focus on that $3.00 per lb target. Bull positioning has been oscillating at these elevated levels for several weeks as the price bangs its head against the “big number”.
A failure to break higher on the charts is likely to trigger a sell-off by the faster-reacting technical trading funds. A surge to new highs, on the other hand, would feed the bull fires further.
Bears, meanwhile, are having a hard time in the London copper market as time-spreads contract, making it more expensive to roll short positions.
The benchmark time-spread between cash and three-month copper CMCU0-3 flexed out to a backwardation of $28.00 per tonne on Friday before closing the week valued at $21.50. That's the tightest it's been since March 2019.
More worrying for short position holders has been the turbulence in the LME “tom-next” spread, which traded at $6 per tonne backwardation on Friday and at a backwardation of $4.75 Monday morning.
This is the cost of rolling a position overnight and for those on the wrong side it’s getting pretty painful.
Spreads tightness reflects low inventory cover in the LME warehouse system.
Registered stocks have slumped to just 97,900 tonnes, the lowest level since 2007. Moreover, almost half of that is ear-marked for physical load-out. LME “open” tonnage, which is the liquidity pool for trading and position settlement, stands at just 53,250 tonnes.
And most of that seems to be held by one entity.
The exchange’s daily positioning reports, backdated two trading days, show one player holding 80-90% of those stocks <0#LME-WHL>, a dominance that rises to over 90% once cash-date positions are included <0#LME-WHC>.
This position is measured against “open” stocks, which are of course very low, but it is big enough to be causing congestion for short-position holders. The tightness would be even more acute were it not for the LME’s rules stipulating such a dominant entity must lend at zero premium until the position falls below the 90% threshold.
The LME’s sliding scale of lending caps is containing the tightness but while stocks cover remains this low, more “tom-next” volatility is to be expected.
TESTING THE OPTICS
Why are LME stocks so low despite the coronavirus hit to demand?
The answer appears to lie with China’s unprecedented appetite for importing refined copper. The country’s imports have risen by 33% to 2.5 million tonnes this year. The net call on metal from the rest of the world is 441,000 tonnes higher than at this time last year.
Copper market optics appear super-bullish with China hoovering up Western surplus amid a renewed surge in infrastructure and construction activity. It all looks like a rerun of the last crisis in 2009, when China’s massive purchases propelled copper from below $3,000 per tonne to an all-time high of $10,190 in 2011.
However, be wary of history repeating itself exactly.
LME stocks, in particular, may be flattering the bullish picture. There is almost certainly more metal “out there” beyond the limits of exchange-registered reporting.
The LME’s recently-launched monthly report on shadow LME stocks revealed 157,000 tonnes of copper sitting in look-alike LME storage at the end of June. Most of that, 121,000 tonnes, was located in Europe with Rotterdam accounting for 81,000 tonnes.
This is metal that is being stored under warehousing contracts that explicitly reference the option of delivery onto LME warrant. There may be much more sitting further in the unreported shadows.
Evidently, whoever is holding such off-market stocks hasn’t yet seen a reason to deliver them to the LME.
That might change if the cash premium expands further. Backwardation is the market’s way of replenishing stocks and the growing LME copper backwardation might displace the current Chinese gravitational pull on the world’s free metal.
Doctor Copper may be about to get an eye-test on those bullish optics.
But for now he seems to be back on the fund radar and chart technicals, particularly on the CME market, are likely to exert the bigger short-term influence on whether he stays there.
Editing by David Evans
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