Skip to main content

Last week’s inversion of the two-year and 10-year U.S. Treasury notes has raised the specter of recession, sending tremors through U.S. stock markets.

Those who follow the copper market, however, will know that “Doctor Copper” with his honorary degree in economics got there first.

London Metal Exchange (LME) three-month copper has slumped from above US$6,600 a tonne in April to a current US$5,800.

Global economic weakness is being led by the manufacturing sector with activity contracting or slowing just about everywhere. That includes China, the powerhouse of industrial metals demand.

Funds are now taking an ever more bearish view of copper’s prospects on the CME market.

The current “big short” is the biggest yet seen and the only surprise is that copper has not yet cracked under the weight of all this money.

It helps that copper is once again going through one of its periodic supply squeezes.

It helps a lot more that Chinese speculators don’t yet seem ready to turn as sour on copper as the CME bears.

Funds were holding a collective net short of 68,545 contracts on the CME copper contract as of Tuesday, Aug. 13

Money managers’ short positions had hit a new all-time high of 118,448 contracts the previous week, eclipsing the previous record big short in June, 2019.

Expressed relative to open interest, bear bets are as large as they’ve been since the global financial crisis of 2008-09, according to analysts at Citi.

You can understand the logic.

Manufacturing activity is contracting in both China and the euro zone and stalling sharply in the United States.

The automotive sector, a key driver of demand for metals such as copper and aluminum, is particularly weak as a cyclical downturn is compounded by the structural challenges of a mass migration to electric vehicles.

Against such darkening prospects, a simmering U.S.-China trade war is doubly negative, the broader impact on global trade coming with a specific hit on already stuttering manufacturing supply chains.

The industrial part of the market is torn between the darkening macro clouds and copper’s still robust micro dynamics.

It’s clear there’s no shortage of refined copper right now. LME warehouses received almost 65,000 tonnes of metal last week, although the size of the deliveries may have had more to do with storage than copper price drivers.

Further up the supply chain, however, copper supply is in trouble again.

The International Copper Study Group (ICSG) forecast in May that global mine production would be flat this year. It will struggle to meet even that low-ball assessment.

World mine production actually fell by 1 per cent in the first four months of 2019, according to the ICSG.

During past periods of low copper prices, too much production was as much the problem as demand.

This time around, there is no flood of new mine supply. There’s not even a trickle.

It’s noticeable that LME positioning isn’t nearly as bearish as that on the CME.

LME broker Marex Spectron estimates the net speculative short on the LME contract was 7.5% of open interest last Wednesday, compared with peak short positioning this year of 12.3 per cent in June.

While New York’s bearish and London’s more ambivalent, the all-important Chinese segment of the speculative spectrum doesn’t appear to have any view.

Copper seems to have fallen off the investment radar this year in China, possibly because there have been better returns to be made in “hot” markets such as iron ore and, more recently, nickel.

The Shanghai Future Exchange’s copper contract saw volumes slide by 24 per cent in the first half of the year and they are dwindling further this month. Current market open interest of 622,710 contracts is low by Shanghai standards.

It is the lack of any bear momentum on the Shanghai market that is helping copper withstand the bear attack on the CME, according to Citi.

Citi’s conclusion is that if Chinese speculators were to commit to a median-size bear attack, “we find that this would result in an US$800 a tonne copper sell-off from US$5,700 per tonne to US$4,900.”

By which stage you wouldn’t need an inverted yield curve to tell you something was very amiss in the global economy.

Copper’s not there yet but it’s finely balanced with uncommitted Chinese players holding the key to the next major move.

Follow related authors and topics

Authors and topics you follow will be added to your personal news feed in Following.

Interact with The Globe