Fund managers have been reducing their exposure to copper as the market heads into what is normally a seasonally weak spot for demand.
Supercycle bulls will argue that this is just a temporary soft spot before green infrastructure stimulus starts building momentum in Europe and the United States.
Supercycle skeptics counter that copper and other industrial metals haven't yet escaped the old China cycle, which is currently cooling fast.
Copper is in a period of peak narrative confusion and the price is currently reflecting that uncertainty. London Metal Exchange (LME) three-month metal has been locked in choppy sideways action after last month’s slide to the $9,000-per tonne level, last trading around $9,370.
Investors have reacted by rotating out of copper in search of better returns in "hotter" metals, particularly iron ore and steel, and a resurgent energy complex.
Funds remain net long of the CME copper contract and indeed the latest Commitments of Traders Report shows the long growing from 19,266 contracts at the end of June to a current 32,506.
However, that’s not a reflection of increased bull commitment. Money manager outright long positioning has risen only marginally from 58,099 contracts to 60,152 over the same period. It is still down by more than half since early May.
Rather, the change in net positioning is down to a sharp reduction in short positions that accumulated after LME copper hit a nominal all-time high of $10,747.50 per tonne in May.
Bear bets on the CME contract have been slashed from 44,978 to 27,646 contracts. Given the preponderance of automated trading programs on the CME market, this is likely a reflection of copper’s ability to hold the $9,000 level and break the downward price momentum from the May highs.
The broader lack of investor conviction on copper is also clear to see in collapsing open interest on the CME contract. It has slumped back to one-year lows and a time when the post-lockdown copper rally was in its formative stages.
Investor indifference is also characterizing both the London and Shanghai markets.
LME broker Marex Spectron estimates speculators are currently net long of the LME copper contract to the tune of 9 per cent of open interest, down from a multiyear high of 62 per cent in February when copper’s bull fires were blazing.
Funds are more enthused about aluminum, tin and even unsexy lead on Marex Spectron’s estimates.
Chinese speculators are equally conspicuous by their absence.
Activity noticeably slowed on the Shanghai Futures Exchange (ShFE) copper contract last month. Volumes were the lowest since October last year, while market open interest has fallen to levels last seen in early 2020.
Investors in all three copper contracts are evidently giving the metal a wide berth right now as the market cools and the broader bull-bear argument remains unresolved.
Copper's hardest headwinds are blowing from China, where the post-COVID stimulus effect is diminishing.
The country’s economic growth is expected to have braked sharply in the second quarter due to higher raw materials costs and new COVID-19 outbreaks, according to a Reuters poll of 51 economists.
The central bank's move to cut reserve ratios for the first time since April last year, freeing up an estimated 1 trillion yuan ($154.19-billion) in long-term liquidity, is a sure signal that policy-makers are worried about growth again.
Such macro concerns are being reflected in copper's micro dynamics.
China’s imports, the bedrock of last year's price recovery, are slowing, down for the third straight month in June.
The chill effect is starting to hit the LME market in the form of rising inventory and loosening time-spreads.
LME stocks currently stand at 220,575 tonnes, more than double year-start levels and the highest since June last year.
The benchmark time-spread – cash to three-month metal <CMCU0-3> – closed Monday valued at a contango of $35.50. The same part of the forward curve was trading in a backwardation of $30.00 as recently as May.
It’s a sign of a much looser physical market as more units are freed up by China’s slowing import appetite.
China's slowing growth impetus is becoming more apparent just as copper heads into the northern hemisphere summer holiday period, always a seasonally weak spot for demand.
It's still far from clear whether the recovery momentum in the rest of the world can pick up China's slack.
The even bigger question is whether the decarbonization trend – with its promised supercycle demand boost from electric vehicles and renewable energy – is yet sufficiently developed to exert a tangible impact on copper’s dynamics.
Since there is insufficient evidence to prove the case either for or against, it’s no surprise that the investment community has left copper to find surer short-term bets.
The resulting lack of positioning, manifest in low open interest across all three exchanges, leaves the copper price at precariously poised.
A mass move back into copper could in itself be a key price determinant, whether on the short or the long side. It’s quite possible that the trigger will not be copper-specific but rather a realignment of the broader macro reflation trade.
Doctor Copper may seem to be nodding off to the summertime blues but that doesn’t mean it’s going to be a quiet summer.