Copper may be poised to embark on a new energy transition supercycle but it is currently struggling to escape the gravitational pull of the old Chinese supercycle.
China has been the core driver of copper pricing over the last two decades as the country built new cities and rolled out the infrastructure needed to power them.
Booming domestic demand for industrial metals was coupled with rising exports of manufactured products as China became the world’s workshop.
The twin engines of China’s previous spectacular growth are now stuttering as a property bubble deflates at home and high inflation weakens demand for its products abroad.
The London Metal Exchange (LME) three-month copper price has been oscillating in a $7,800-8,870 per metric ton range since May as old and new price drivers compete.
Fund positioning on both the LME and the CME is equally caught between a waning China-centric supercycle and the nascent green supercycle.
Chop and churn
Money managers flipped back to net short of the CME copper contract at the start of this month in a continuation of the positioning chop that has characterized the market since March.
The gyration in net positioning is partly a reflection of copper’s own choppy range-trading with many black box funds configured to react to changes in directional momentum.
It is also down to the ebb and flow of the Chinese recovery narrative.
Early-year optimism that the country would rebound strongly from last year’s zero-Covid restrictions was dispelled by the end of the first quarter.
Since when copper and the rest of the industrial metals pack have been trading the prospect of renewed stimulus by Beijing policymakers.
Support measures have so far failed to match bullish expectations even as the rumblings from a distressed property sector grow ever louder.
Money managers have lifted outright short positions on CME copper to 69,707 contracts, the largest collective bear bet on lower prices since early 2020.
Long positions slipped to 51,580 contracts over the week to Aug. 15 but only after hitting a six-month peak of 63,957 the previous week.
The net short position of 18,127 contracts is a sign the bears are in the ascendancy.
Bullish and bearish
In London it’s the bulls who have the upper hand, investment funds net long of the London copper market to the tune of 14,143 contracts as of the close of Aug. 11.
However, there is equal confusion as to copper’s next major directional move with money managers ramping up both bullish and bearish bets.
Outright short positions held by investment funds reached 47,541 contracts on Aug. 11, the heaviest bear commitment since the LME first started publishing its Commitments of Trading Report in 2018.
However, bullish bets also hit a fresh high of 67,583 contracts the week earlier before easing back to 61,724 in the last reported week.
Fund managers of different complexions have been simultaneously peak bullish and peak bearish over the first part of the month.
“Other financial” players, which includes index operators and insurance companies, are caught somewhere in the middle, holding a marginal net long position of 3,911 contracts.
Waiting for lift-off or breakdown?
The key takeaway from speculative positioning on both US and London markets is that fund players are betting bigger on copper.
The recent accumulation of both short and long positions suggests funds are positioning themselves ahead of some sort of break-out from the recent trading range.
It’s just that there is no consensus as to whether the copper price will break upwards or downwards.
Which is more important? Old cycle or new cycle?
China’s property woes are piling up with developer Country Garden in financial difficulty and missed payments on investment products by Zhongrong International Trust Co highlighting the risk of contagion to China’s $3 trillion shadow banking sector.
The bullish counterpoint comes in the form of rising copper usage in energy transition applications as both the United States and Europe turbocharge electric vehicle sales and the renewable energy network needed to support the pivot away from fossil fuels.
Doctor Copper appears undecided as to which supercycle is currently strongest.
Fund managers are too.
(The opinions expressed here are those of the author, Andy Home, a columnist for Reuters.)
(Editing by David Evans)