LONDON - Copper prices collapsed to a 16-month low last week amid mounting concerns that inflationary pressures in western economies will morph into outright recession.
Investors are repositioning themselves in copper, with the last few remaining bulls retreating and bears flexing their muscles on the short side.
Copper is just one component of the broader reconfiguration of expectations playing out across the financial spectrum.
All the industrial metals traded on the London Metal Exchange (LME) have been hammered in recent days, spectacularly so in the case of tin, which has halved in price since March.
The sell-off has extended across the commodities complex. The total net long across 24 tracked commodities has fallen to a 22-month low, according to Saxo Bank.
Macro angst has swept aside copper's still-positive micro fundamentals.
It only remains to be seen how aggressive funds want to be on the short side, given the potential for a counter-cyclical recovery in China, the world's largest copper user.
Money managers turned net short of the CME copper contract at the start of May, only to be whiplashed out of their positions by a strong price correction higher.
Then it was concern about Chinese demand that fed the macro negativity. Now it is fear about demand everywhere else, as high energy prices slow economic activity in the rest of the world.
Funds have responded by lifting their CME short positions again, from 40,104 to 51,057 contracts. Outright long positions have been reduced to a two-year low of 35,098 contracts.
Net positioning has flipped to the short side again to the tune of 15,959 contracts, just off the May short peak of 17,736 contracts.
There is an important caveat to these figures, however. The latest Commitments of Traders Report shows the positioning landscape at the close of Tuesday, June 21. CME copper broke through a key technical support level at $4.00 per lb ($8,818 per tonne) the following day.
Given the preponderance of systematic funds in the CME market, it's more than likely that the deterioration in technical signals generated another bearish shift in the speculative mix.
LME broker Marex runs its own estimates of investor positioning and thinks the speculative short position is still expanding. That in London has now ballooned to 43,700 contracts, equivalent to 31.7% of open interest as of last Friday.
Basis Marex' estimates, the last time funds were this negative about copper was in January 2015, when the price began with a "5" and the market was in the last phase of an extended downtrend dating back to 2011.
WAITING FOR CHINA
LME three-month copper is currently trading around $8,520 per tonne after recovering from Friday's lurch down to $8,122.50, the lowest print since February 2021.
Given the waves of gloom washing through markets, many analysts seemed braced for more downward pressure in the days to come.
Much, however, will depend on whether fund managers build out their bear bets or opt for a more cautionary, risk-off approach to copper.
China is the big counter-cyclical unknown.
The country's copper demand has been dented by months of on-again-off-again COVID-19 lockdowns, but there are signs things are normalising.
Quarantine times for inbound travellers have just been halved, which won't do anything directly for copper demand but is symbolic of a broader gradual easing of restrictions.
Beijing has promised more infrastructure spending as a way of stimulating growth after the pandemic, although metal markets have been underwhelmed by what they've seen so far.
Investors clearly don't think China is going to ride to the rescue quickly enough to offset a manufacturing slowdown in Europe and the United States.
However, the potential remains for China to act as a counter-weight to weakness everywhere else. This is what it has done ever since the financial crisis, funnelling government stimulus down infrastructure and property channels to cushion the Chinese economy from external shocks.
The dynamic zero-tolerance approach to outbreaks of coronavirus has diluted the efficiency of the stimulus so far this year.
But with both Shanghai and Beijing reporting zero new cases simultaneously for the first time since February, the prospects for a recovery in the engine-room of global manufacturing activity are brightening.
If Chinese copper demand starts recovering, it will do so against a backdrop of low inventory in the country. Stocks registered with the Shanghai Futures Exchange currently total 57,153 tonnes, down from almost 168,000 tonnes as recently as March.
It's a reminder that copper's supply chain remains challenged, albeit in better condition than last year, when LME stocks fell to near zero and the exchange had to step in to prevent the London contract becoming disorderly.
But right now fund managers are evidently in no mood to worry about copper's micro dynamics. It's the big picture that counts, and the big picture is one of darkening economic clouds on the horizon.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Jan Harvey)