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Column: Funds unimpressed by mounting copper supply disruption

LONDON (Reuters) - Two Chilean copper mines have been hit by strike action over the last week and a Canadian one has just been suspended due to wildfires.

An employee carries copper hoses at the Sociedade Paulista de Tubos Flexiveis (SPTF) metallurgical company which manufactures flexible metal hoses, in Sao Paulo April 20, 2012. REUTERS/Nacho Doce/File Photo

The copper supply hits are mounting up, but you wouldn’t know it from the price action.

London Metal Exchange (LME) three-month copper has so far spent the month of August gently bobbing around the $9,500-per-tonne level, last at $9,440.

The lack of excitement reflects a dearth of speculative interest in copper right now, with fund positioning low on the LME, the CME and the Shanghai markets.

Macro headwinds in the form of slowing growth impetus in China and the spread of the Delta variant of COVID-19 are currently outweighing copper’s micro dynamics in investor minds.

FUNDS TAKE A HOLIDAY

Fund managers have collectively taken something of a holiday break on copper.

LME broker Marex Spectron estimates the net speculative long on the London market was 4.3% of open interest as of last Thursday - a one-year low. The collective bull bet reached 62% of open interest back in February, when copper was charging up through the $9,000-per-tonne level.

Funds remain net long of the CME copper contract but the commitment is weak by historical standards, amounting to 31,965 contracts.

That’s slightly up on June’s one-year low of 19,266 contracts, but a long way off the February peak of 87,671 when bull spirits were rampant.

It’s noticeable that funds started rebuilding outright short positions on the CME contract after the dilution of the short squeeze on the September-December time-spread at the end of July.

Activity on the Shanghai Futures Exchange (ShFE) has been subdued since April, when open interest peaked at 394,614 contracts. It currently sits at 307,40, with trading volumes light over the last few weeks.

Investors everywhere seem decidedly unconvinced that copper is going to revisit June’s record nominal high of $10,747.50 per tonne any time soon.

DEMAND HEADWINDS

When it comes to copper, the investment proxy for global growth, fund managers are still taking their cue from China, where a stimulus-fuelled recovery is fading.

Industrial output, fixed asset investment and retail figures out on Monday all came in below expectations, adding to nervousness about the potential spread of the Delta variant within the country.

China’s refined copper imports fell for the fourth straight month in July, adding to the sense of lost momentum, although the greater availability of scrap metal is an important hidden factor behind the headlines.

Meanwhile, the green infrastructure boost in the rest of the world is still pending.

The U.S. Infrastructure Bill’s $1 trillion focus on upgrading transport systems and homes could boost the country’s copper demand by 3%, or 80,000 tonnes per year, over a five-year period, according to research house CRU. (“The American infrastructure plan - what does it mean for metals demand?”, Aug 12, 2021)

But the bill hasn’t yet passed and until it does, there won’t be any tangible traction on physical market dynamics.

The sunny uplands for copper may beckon, but fund managers are more concerned about the immediate chilling of the Chinese recovery story.

SUPPLY HITS

Which is why the copper price currently seems unfazed by the lengthening list of supply hits.

True, a walk-out at Chile’s Escondida mine, the world’s largest, was averted at the eleventh hour, but strikes began at the Caserones and Andina mines last week.

Union leaders at Caserones, owned by Japan’s JX Nippon Copper, didn’t even wait for the full 10-day mediation period to end before walking off the job. The mine produced 127,000 tonnes of copper last year.

Andina, which is owned by state producer Codelco and produced 184,000 tonnes of copper in 2020, is currently operating at a reduced rate after the start of strike action last Thursday.

It’s a reminder that high prices often beget supply problems as unions everywhere try to grab a bigger slice of the cake for their members.

Escondida, where a smaller union took strike action in May, saw talks with its bigger union go down to the wire. So too did negotiations at Antofagasta’s Los Pelambres mine in March and Codelco’s Radomiro Tomic mine in April.

Every labour contract renewal comes with heightened tension when copper has just hit all-time highs.

The temporary suspension of the Highland Valley mine in Canada due to a nearby wildfire is a reminder of just how accident-prone copper’s supply chain can be at the best of times. The mine produced 120,000 tonnes of copper last year.

These production hits are cumulatively going to slow the recovery in output at the world’s mines, many of which had to lower operating rates due to local lockdowns last year.

Nor has the copper market experienced a huge build-up in stocks during COVID-19 thanks to China’s record imports in the first half of this year.

LME-registered inventory appears to suggest a market awash with metal, up 130,000 tonnes on the start of the year at a current 235,550 tonnes.

But off-market LME stocks and those registered with both the CME and the ShFE have been sliding. The total visible stocks build over the first half of this year was a marginal 49,000 tonnes.

Which leaves the supply chain more vulnerable to unexpected disruption than it might seem.

Goldman Sachs, which is firmly in the bull commodities camp, suggests that while Chinese demand has got copper to where it is, struggling supply will provide the next lift in price.

The tension between macro negativity and micro positivity is “particularly acute for copper”, given a structurally challenged supply chain, the bank argues. (“A bumpy road higher”, Aug. 16, 2021)

Funds and speculators of all shapes and sizes are evidently waiting it out while the macro-micro tension plays itself out.

Whichever proves stronger - negative macro or positive micro - will determine whether they go short or long when they return from their summer break.

The opinions expressed here are those of the author, a columnist for Reuters.

Editing by Jan Harvey

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