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Copper continues to rewrite the record books.

London Metal Exchange (LME) three-month metal punched through its previous record high of $10,190 a tonne, set in 2011, to touch $10,747.50 on Monday.

Copper sits at the epicenter of the broader rally unfolding across the commodities space, which super-bulls such as Goldman Sachs say is the start of a supercycle analogous to that of the 2000s.

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The metal’s usage profile affords it exposure to global manufacturing recovery, post-pandemic rebuild and decarbonisation. Whether the world’s copper miners can meet that demand is a moot point, given chronic past underperformance and a lengthening list of supply threats.

Chile, the world’s largest copper producer, is facing both short-term disruption from labor negotiations and long-term disruption from a planned increase in mining royalties.

Such headlines inevitably add more fizz to an already heady bull cocktail, which has lured some funds into fresh bets on higher prices.

But there is clear investor caution about a market that has risen in a near straight line for more than a year. Somewhat ominously, given China’s role in the global copper market, Chinese investors appear particularly cautious.

BACK IN THE GAME

Fund managers had been steadily reducing their long exposure to copper over the course of March and the first half of April, even as the price marched ever higher.

However, a string of technically strong closes on the CME contract has enticed some, most likely algorithmic black-box players, back in on the long side.

Funds have lifted their net long positioning on CME copper from a mid-April low of 38,273 contracts to 66,421 as of last week’s Commitments of Traders Report.

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Just about all of the change has come through fresh long positions, but relative even to the second half of last year the collective bull commitment looks modest.

Similarly in London, where LME broker Marex Spectron estimates speculative money was net long of copper to the tune of 43% at last week’s close. That’s high but not as high as the 62% peak registered in February, when the fund position on the CME contract was also topping out.

LACK OF CHINESE BUY-IN?

If fund managers in the west appear to be wary about committing to copper at these heady prices, Chinese investors seem even less enthused.

The Shanghai Futures Exchange (ShFE) copper contract’s record high has been greeted by a sharp reduction in market open interest and plummeting volumes, which slumped to their lowest since October on Friday.

It is true that China’s army of momentum-seeking retail investors are spoilt for choice with iron ore and steel the current hot markets. Chinese exchanges last week took seemingly coordinated action to dampen speculative excess across a spectrum of ferrous contracts.

That may yet divert some speculative money into other commodity markets, but at these prices copper is becoming an expensive game even for day-traders.

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Moreover, copper’s bull credentials may appear a lot less convincing from a Chinese investment perspective than they do in the west right now.

China’s massive physical purchases of refined copper, both commercial and state, have been the primary driver of the post-pandemic price rebound.

But the import impetus is fading as China, like buyers everywhere, balks at the price.

Refined metal imports have been trending lower since the start of the year and continued doing so in April, to judge by the preliminary trade snapshot

And they’re going to slow further.

The Shanghai Metal Market Yangshan copper premium is a closely watched barometer of China’s physical import demand. It is currently assessed at $38.50 a tonne, the lowest print in a pricing series going back to 2017.

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The Chinese market, in other words, shows every signs of a glut, which is not surprising given the country imported 4.4 million tonnes last year, up 1.2 million tonnes from 2019.

It’s easy to see why Chinese speculators feel there are better bull plays in town. First and foremost is the steel sector, where the narrative has shifted from demand recovery to capacity curtailments.

BUYING THE DIP?

Outside of China copper is trading in rarefied air.

There is no evidence from the CME and LME positioning reports that fund money has been the primary driver of the last leg of the rally. Money managers are long but not excessively so by historical standards.

Rather, the whippy price action above $10,000 a tonne bears all the hallmarks of short-covering, particularly in the LME options market, as traders scramble to cover exposure to call options granted at much lower prices.

Copper was trading below $10,000 on Thursday, since when the price has rallied through June call option strikes holding over 140,000 tonnes of open interest. Each tonne of exposure has to be hedge-bought in the futures market, or hedge-sold if the price goes into reverse.

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There is plenty more upside exposure in the months ahead, but options activity has more recently switched to downside put protection, particularly in September, where open interest is evenly split between calls and puts.

There are still plenty of supercycle skeptics out there, who argue that copper won’t hold at these elevated levels as the Chinese economy slows in line with receding stimulus. Many Chinese investors appear to be in that camp.

However, even super-bulls now concede that the market may be in danger of overheating.

Copper’s rally began from a low of $4,371 a tonne in March last year and has done no more than pause for breath a couple of times before resuming. Since markets do not move in straight lines for ever, the collective fear of heights grows with every move upwards.

Marex Spectron notes in today’s client report that metals are seeing “risk reduction via options and outright pricing” but the overall mantra remains “buy the dips.”

With copper last trading at $10,450 a tonne, however, the question is, what dip?

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