LONDON (Reuters) - Industrial metals such as copper have clawed their way back from coronavirus crisis lows, with the London Metal Exchange (LME) index of leading base metals contracts 12% off its March trough.
Market optics are generally positive. With the exception of aluminum, visible exchange stocks have failed to build significantly despite the undoubted damage to demand.
Even the rise in LME aluminum inventories has been modest compared with the global financial crisis a decade ago.
China appears to be regaining its import appetite and metal traders are increasingly trying to move on from the price collapse of the first three months of the pandemic.
But conspicuous by its absence is any hedge fund buy-in to the recovery story.
Investors are reducing bear positions but few seem willing to bet that the worst is over.
The investor landscape is neatly captured by the Commitments of Traders Report on the CME copper contract, a product characterized by higher speculative participation than its London counterpart.
The net money manager short position has been contracting steadily from an early 2020 peak of 58,557 contracts to only 5,300 contracts last Tuesday (May 26).
Just about all the action, however, has been short-covering. Outright bear positions have been cut to 41,215 from almost 101,000 contracts in February. In part, this has been a mechanistic process as trend-following trading programs respond to the steady price recovery.
Outright long positions have increased only marginally to 35,915, from 28,991 in early April, and are still at levels last seen when the industrial metals complex was transitioning through a cyclical China downturn in 2016.
Underlining the lack of fund participation has been a collapse in open interest on the copper contract. There has been a marginal pick-up over the past couple of weeks, but overall activity is back at 2016 levels.
This pattern of bear retreat is being mirrored on the LME, says broker Marex Spectron, which publishes its own weekly estimates of speculative positioning.
Net investor positioning remains weighted to the short side in every metal other than tin, where positioning is assessed as virtually flat.
In all cases, short positioning has been retreating from the extreme levels over the first three months of 2020 but with no signs of a shift towards a more bullish stance.
If money is entering the metals space, it is flowing into precious metals rather than industrial metals, according to Citi analysts.
The bank estimates that funds have pumped $41.7 billion into the commodities space this year, with gold and silver accounting for 81% while base metals continue to lag. (“Commodities Flows”, June 1, 2020).
Funds’ reluctance to buy into the prospects of a base metals recovery is first and foremost down to what is happening in China as it leads the world out of coronavirus lockdown.
Manufacturing activity is recovering from its February meltdown and both the official and unofficial purchasing managers indices (PMI) are bouncing back into expansionary territory.
However, the point of maximum weakness remains export orders, which is unsurprising given that factory activity and consumer confidence are picking up very slowly in the rest of the world.
The export orders component of the official PMI shrank for a fifth consecutive month in May, with more than half of companies reporting a lack of demand, says Zhang Liqun, an analyst at the China Federation of Logistics and Purchasing (CFLP).
In times of crisis past, such as 2008-09 and 2016, Beijing has come to the rescue with massive metals-friendly infrastructure stimulus packages.
This time, however, things are panning out slightly differently. Yes, government spending is ramping up, but China’s leadership is wary of repeating mistakes of the past.
The government does not want to open the “floodgates”, Premier Li Keqiang said last Thursday at the end of the annual meeting of parliament. nL4N2DA29O]
Symbolic of this shift in stance is the dropping of the official GDP growth target. The previous policy of doing anything and everything to stimulate headline growth has evidently been dropped.
There are lots of metals-positive points in Beijing’s action plan, such as boosting spending in clean energy technology, but China’s leadership appears to have tired of mopping up excess liquidity and dealing with “blind investment” caused by previous stimulus packages.
In short, iron ore and steel markets have reacted positively and base metals largely negatively to Beijing’s announcements.
Citi notes that open interest on the Shanghai Futures Exchange’s metals contracts has contracted over the past couple of weeks as tentative bulls took profits.
The two notable exceptions are aluminum and tin, both of which are reflecting tightening physical availability in the domestic market.
This is partly down to disappointment that an expected cut to value-added tax on metals has not materialized. But in greater part, it seems to be down to disappointment with the nature of the stimulus package.
And that’s the rub.
If investors in China don’t believe there’s much upside for industrial metals, why would funds in the rest of the world?
Editing by David Goodman