LONDON (Reuters) - (The opinions expressed here are those of the author, a columnist for Reuters.)
The record long holding amassed by fund managers on the CME’s COMEX copper market last August is becoming an increasingly dim and distant memory.
At last August’s peak of almost 125,000 contracts, their collective positioning exceeded anything seen previously, even during copper’s boom years of 2009 and 2010, when prices hit 4.6255 cents/lb ($10,200 a ton).
Since the start of January, however, there has been a mass exit, net positioning collapsing to near neutral.
This peaking of bullish sentiment has also been mirrored on the London Metal Exchange (LME) and on the Shanghai Futures Exchange (ShFE) copper contracts.
So what has spooked the money men?
Graphic on Comex copper price and fund positioning:
As of last Friday fund managers were holding a net long position of 3,821 contracts on the CME copper contract.
The evaporation of bullish exuberance has been rapid.
Though funds had already started reducing their positioning over the fourth quarter of 2017, collective length still amounted to almost 100,000 contracts at the end of the year. Prior to last year that would have been a record holding.
The reduction of speculative length has in no way hampered copper volumes on the New York exchange.
First-quarter copper futures volumes surged 41 percent year on year, with options volumes jumping to 57,852 contracts from only 11,943.
The liquidity boom that accompanied the original build in speculative length is continuing. It’s just that the bulls have turned bears, or at least a lot less bullish.
A similar mass retreat has taken place in the London market, says LME broker Marex Spectron.
It calculates that speculative positioning amounted to 58 percent of open interest at the start of September 2017, the highest level since 2004.
By the start of January, funds had reduced their positions to 16 percent of open interest and are now “largely neutral”, Marex says.
In Shanghai, meanwhile, open interest on the ShFE copper contract surged to a three-year high in March as the price slid, suggesting a mass shorting of the market.
Chinese players could be leading this retreat from the copper market.
The step-change in activity on the CME copper market since 2016 has been attributed in part to speculative money flows seeping out of mainland China.
It’s also noticeable that the implosion in speculative positioning took place not in December, the turn of the new year in the West, but in January and early February ahead of the Chinese Lunar new year.
And since Chinese markets resumed trading at the start of March, “China appears reticent to drive our markets higher”, to quote today’s daily “LME Morning Thoughts” from Marex Spectron.
They are certainly not the only ones reducing long exposure to copper.
Geopolitical risk seems to be ratcheting up daily and, with China and the United States raising the trade war stakes, investors are justifiably concerned about the impact on the world economy.
This has naturally weighed on industrial metals such as copper, which is heavily exposed to the health of global manufacturing.
That said, China seems to have turned collectively bearish on copper before the latest tensions.
And when China turns bearish on copper, it’s worth paying attention, since the country has been the driver of copper consumption growth for more than a decade.
So far this year China’s physical copper imports have held up pretty well.
Refined metal imports were up 6 percent year on year in January-February and those of mined concentrates by 13 percent.
Tighter regulations have caused imports of copper scrap to drop by 40 percent, but that should translate into higher import demand for copper in other forms.
Yet that hasn’t stopped a super-charged build in global exchange stocks of copper.
Visible inventory often rises at the start of any year because of the Western and Chinese holidays and a seasonal weak spot for construction activity across the northern hemisphere.
But the first quarter’s 348,000-tonne increase in inventories across the three global exchanges — LME, CME and ShFE — was the biggest in at least 15 years.
At a cumulative 889,000 tonnes at the end of March, exchange inventory was at its highest since 2003.
The biggest component of the first-quarter build took place in the LME warehouse network, where stocks rose by 182,375 tonnes.
What’s particularly noticeable is the end of the long-running bear-bull tussle that resulted in metal arriving in LME warehouses promptly disappear again in the direction of China.
Inevitably, a stocks build of this magnitude is dampening bullish enthusiasm and weighing on outright price levels.
And conspicuous by its absence this year has been any strong bull signal.
This year’s proliferation of expiring labor contracts at key mines excited the market in the closing part of last year, but that excitement has been dialed back as several contracts — most significantly at the Los Pelambres mine in Chile — have been renegotiated without disruption.
The biggest potential flashpoint will be Escondida, the world’s largest copper mine, which experienced a bitter 43-day walkout early last year.
However, even here the mood music seems to be surprisingly peaceful, given the union’s acceptance of management’s offer to start early exploratory talks ahead of the July 31 deadline.
Lacking any obvious bullish entry signal, speculators are left mulling a bearish cocktail of high inventory, expected slowdown in China and potential escalation of a trade war between some of the world’s most powerful nations.
Copper’s bull party could resume, therefore, but for now there’s no good reason for it to do so.
But one thing copper bulls can cling to is the resilience of the metal’s price to the mass exodus of the money men.
The unloading of hundreds of thousand of tonnes of long positions across the major exchanges has stalled but not reversed copper’s rally from the early 2016 cycle trough.
And what the money men take from the market, they can just as easily return.
Editing by David Goodman