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Copper prices were under pressure Monday morning, with London Metal Exchange (LME) three-month metal falling below the US$10,000-per-tonne level for the first time in a month.

Copper has spent the last few weeks hanging in suspended animation, the price too high for buyers to chase the market, supply too tight for sellers to risk shorting it.

The risk equilibrium appears to be shifting, however, with signs that funds are starting to raise bear bets on the CME copper contract.

Supply concerns haven’t gone away. Far from it.

Protests at two big copper mines in Peru knocked out a fifth of the country’s production capacity last week before the government imposed a state of emergency to regain control of the Cuajone mine.

However, the market focus is rapidly turning to the demand side of the copper equation, particularly in China, where lockdowns are already braking growth sharply in the world’s largest metals user.

FUNDS LIFT SHORT POSITIONS

Fund managers have been lifting bearish bets on the CME copper contract over the last couple of weeks.

Outright short positions stood at 45,012 contracts as of the close of business April 19, according to the latest Commitments of Traders Report.

They crept past the 2021 peak of 44,978 contracts last week, and bear positioning is now as large as it’s been since May, 2020.

There are still sufficiently significant long positions to keep the collective net speculative exposure marginally net long to the tune of 25,393.

But bears have been conspicuous by their absence for many months in the copper market, and their cautious reappearance is telling.

DEMAND CLOUDS DARKENING

The bears’ return coincides with mounting concern about the outlook for demand due both to spreading lockdowns in China and the continuing war in Ukraine.

Shanghai, home to 26 million people and a major logistics and manufacturing hub, is entering its fourth week of total lockdown.

Many other cities are also being caught up in the government’s zero-COVID dragnet, with fears that Beijing could be next after the capital city began mass testing for all residents of its biggest district, Chaoyang.

The scale of national disruption is inevitably starting to affect the country’s giant manufacturing sector.

Factory activity slumped at the fastest pace in two years in March, the Caixin purchasing managers index sliding to 48.1, its lowest reading since the first pandemic wave early in 2020.

The official PMI also dipped into contraction territory, slipping below 50 for the first time this year.

New orders are falling particularly fast, reflecting both stalled domestic demand and the disruption to overseas markets caused by Russia’s “special military operation” in Ukraine.

As the latter rumbles on, attention in the metal markets has increasingly turned from the war’s immediate impact on supply chains toward the follow-through hit to demand.

Analysts at CRU have downgraded their forecast for global growth this year by half a percentage point to 3.5 per cent to reflect the combination of rising inflationary pressures and sliding consumer confidence, particularly in Europe.

Industrial production will be weaker still at 3.4 per cent, according to an April 5 webinar on the commodities impact of the war in Ukraine.

The first signs of the coming demand hit are starting to show up in countries such as Germany, where factory growth slowed to a 20-month low in April.

LME STOCKS REBUILD

Future demand fears are still being outweighed by short-term production disruption in markets such as aluminum and zinc, where European smelters are exposed to high and rising power prices.

Copper smelting, however, is a less energy-intensive business, and to date there have been no curtailments of European capacity.

Nor have sanctions yet been imposed on Russian copper, although self-sanctioning is making both financing and logistics tougher.

It’s possible that consumer reluctance to accept Russian brands is behind the recent inflow of metal to LME warehouses. Headline copper stocks have rebuilt from an early-March low of 69,600 tonnes to a current 137,275 tonnes.

The refined-metal segment of the supply chain is starting to look a little less depleted, even while output losses accumulate at the mine stage.

MINE DISRUPTION

Over and beyond the social unrest at Peruvian mines, the first-quarter financial reporting season has brought multiple reminders of how many mines are struggling with the lingering effects of COVID-19.

Both BHP and Freeport-McMoRan have already trimmed production guidance, and copper analysts are revisiting their production disruption allowances after several weak first-quarter performances.

Critically for the price, however, the disruption is playing out at the mine concentrates stage of the process chain, which is one segment of the market that appears to be well supplied for now.

China’s copper smelters have just raised their second-quarter floor treatment and refining charges (TC/RCs) to US$80 a tonne and 8 US cents a pound, from US$70 and 7 US cents in the first three months of 2022.

The closing of a private Chinese smelter has freed up concentrates and helped the bounce in treatment charges, but a broader uptrend in the cost of processing raw material reflects an underlying improvement in feed availability for smelters.

The hits to mine supply undoubtedly spell future trouble for copper, but right here and now, it’s the outlook for demand that is concentrating minds.

That’s why the LME price has just fallen out of its one-month range, last trading at around US$9,900 per tonne.

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