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Funds continue to reduce their long exposure to the copper market even as the bull clamour for higher prices grows ever louder.

Goldman Sachs last week doubled down on its supercycle shout, forecasting copper would average $15,000 per tonne in 2025 in a headline-grabbing April 13 research note titled “Copper is the new oil”.

Citi is also firmly in the bull camp with a short-term target of $10,500. “We highlight that the ‘super’ part of the supercycle is now” with the market facing the largest supply deficit since 2003-2004, the bank said.

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Copper is bubbling away just below February’s decade high of $9,617 per tonne, London Metal Exchange (LME) three-month metal last trading at $9,400.

Investors appear to remain highly wary, however, and perhaps for good reason. While a supercycle may be coming, copper is right now still heavily reliant on the Chinese cycle.

And the world’s largest buyer is making it very clear that it doesn’t want raw material prices to rise any further.

CUTTING LONG EXPOSURE

The fund positioning landscape on the CME’s copper contract has shifted significantly over the last couple of months.

The big net long that built as copper rallied strongly off last year’s early COVID-19 lows has more than halved since February.

The stampede to cut outright long positions has abated although collective bull positioning has slipped further to 76,167 contracts, the lowest collective holding since July last year, according to the latest Commitments of Traders Report (COTR).

Short positions, meanwhile, have been creeping steadily higher. At a current 37,894 contracts, bear bets are by no means large by historical standards but are still the heaviest they’ve been since June last year.

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There has been a similar bull retreat on the London market, albeit less pronounced than that on the CME.

Investment funds have reduced their net LME copper long positioning from a February peak of 47,897 contracts to a current 35,950.

Investment money flowing through the “other financials” category of the LME’s COTR - a mix of insurance and index players - has been reducing its long exposure since August last year, albeit with signs the retreat may be coming to end.

In China, meanwhile, the big bull copper play held through Dalu Futures has dropped off the radar amid a notable decline in activity on the Shanghai Futures Exchange’s copper contract.

CHINA WARNINGS

Some of the recent speculative heat in China’s commodity markets has been doused by increasingly strident warnings from senior policy-makers about the perils of high prices.

Premier Li Keqiang pledged earlier this month to strengthen control of raw materials, warning that “surging international commodity prices have brought great pressure on companies’ costs.”

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The coded warning turned to explicit warning today with the Ministry of Industry and Information Technology asserting its determination to keep a lid on commodity inflation. The ministry will work together with relevant departments to stabilise prices, fend off panic buying or hoarding and “resolutely” crack down on market monopoly and malicious speculation, according to spokesman Huang Libin.

He was speaking at a press conference, which is itself a telling sign that China’s leadership wants everyone to get the message.

This is Chinese policy-makers’ standard reaction to high prices and if the warnings don’t deter the speculative hordes, there are plenty of other levers to pull.

STOCKS THREAT

One already used in the aluminium market is to remind everyone the Chinese government itself holds metals stocks and that it might consider releasing them if things get too out-of-hand.

It’s a weak threat in the case of aluminium because no-one thinks the inventory is big enough to make much of a dent in the domestic market-place.

But China holds a lot more copper. Indeed, state entities are widely thought to have added up to another 600,000 tonnes last year taking the total to in excess of two million tonnes, although no-one knows for sure given the country’s strategic copper stocks are shrouded in secrecy.

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There is a precedent for China releasing its copper reserves. It did so in 2010-2011, when the price was trading at record highs above $10,000 per tonne.

Given where the price is now and given the government’s clear dissatisfaction with the inflationary flow-through from rising commodity prices, it might not be long before the copper market also gets a gentle reminder of what’s sitting in state warehouses.

SUPERCYCLE VS CHINA CYCLE

More fundamentally, China’s policy-makers can dampen overall growth by cutting off the credit taps to key end-use sectors such as construction.

Indeed, a cooling of China’s post-pandemic recovery is why analysts such as those at Capital Economics remain in the bear camp, arguing that Chinese GDP will slow over the coming quarters “which underpins our forecast that industrial metals prices will end the year lower”.

The copper market appears to be reaching a defining moment when it decides whether we’re in a new supercycle or the same old China cycle which has defined pricing for over a decade.

If the latter, copper and other raw materials are going to face the increasing headwind of a slowing Chinese demand pulse.

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If, however, the supercycle super-bulls are right, the Chinese infrastructure momentum will pass to the rest of the rest of the world, compensating for any cyclical slowdown in China.

The jury is very much still out.

And a lot of the funds are out as well, waiting for Doctor Copper to come to a decision.

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