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Hedge funds are betting against copper on the London Metal Exchange for the first time since the early months of the pandemic – a sharp reversal from a few weeks earlier, after China’s disappointing recovery sent prices plummeting.
Data from the LME this week showed that investment funds’ positioning on copper has moved to a net short – the first since June 2020 – after bearish bets increased since mid-April and long positions were eliminated.
Copper – Net Positions Hedge Fund – Powered by Commodity Evolution
The metal, considered an economic indicator for its use in all sectors from construction to electronics, has come under increasing pressure after official data showed weak demand from the world’s largest consumer.
This is a dramatic reversal from earlier in the year, when money managers had placed bullish bets on copper, predicting that renewed Chinese demand, coupled with rising consumption of green technology, would deplete the world’s already limited inventories. In recent months, trading stocks have reached dangerously low levels and several key mines have faced operational setbacks and political controversies.
On the other hand, Chinese demand has disappointed as stocks show signs of easing: LME stocks have risen every day for five consecutive weeks. The effect has been stark: the share of short funds on the stock market is close to an all-time high in data going back to 2018, while long bets have been reduced to their lowest in seven months.
The most important variable that disappointed traders was the pace of recovery in Chinese demand for metals. Should prices fall below $7,700, much stronger selling could occur. LME copper futures have recovered some ground in recent days, trading at $8,100 a tonne (today 30 May 09:00 – Italy) after hitting a six-month low earlier in the week.
Long bets on copper have been an increasingly popular choice for investors looking to profit from the energy transition. Wind turbines, electric vehicles and power grids use large amounts of copper, and many analysts believe that rising consumption will drive up prices.
Copper – 3 month $/ton daily
For the time being, however, the focus is on the correlation of copper with broader economic growth, which is facing headwinds from turbulence in the banking sector and tighter monetary policy.
Risk appetite is declining everywhere. Funds are giving serious consideration to the prospect of a recession and are assessing what reduced demand will mean for supply and demand balances.
At the same time, recent mining supply disruptions in Panama, Chile and Peru have taken a back seat. Some large new mining projects have also recently started up, and analysts at Bank of America Corp. and Citigroup Inc. expect a small copper surplus this year.
There are still many risks for speculators on both sides of the copper trade. The prolonged standoff over the US debt ceiling has weighed on risk assets in recent weeks, while traders are still divided on whether the Federal Reserve’s tightening cycle has come to an end.
The Fed’s interest rate hike has also diminished the attractiveness of holding non-interest-bearing assets such as copper for long periods of time. This could discourage those who see the energy transition as a growth driver in the coming years.
