|06 April, 2020

Funds cut copper exposure amid fast-changing fundamentals: Andy Home

Funds have slashed their exposure to the copper market over the last two weeks

Image used for illustrative purpose. An employee carries copper hoses at the Sociedade Paulista de Tubos Flexiveis (SPTF) metallurgical company which manufactures flexible metal hoses, in Sao Paulo April 20, 2012.

Image used for illustrative purpose. An employee carries copper hoses at the Sociedade Paulista de Tubos Flexiveis (SPTF) metallurgical company which manufactures flexible metal hoses, in Sao Paulo April 20, 2012.

REUTERS/Nacho Doce/File Photo

(The opinions expressed here are those of the author, a columnist for Reuters.)

LONDON- Funds have slashed their exposure to the copper market over the last two weeks in response to a confused and fast-changing fundamental landscape.

Long positioning had already been cut to the bone on fears of the global demand shock emanating from the spread of the deadly coronavirus.

Now however short positions have also been slashed as the copper price loses downside momentum and traders track the accumulating hits to supply both from viral lockdowns and bombed-out prices.

Copper's underlying dynamics seem to be changing almost daily, persuading many participants including the money men simply to stand aside until a clearer picture emerges.

IF IN DOUBT, GET OUT

Funds held a net short position of 24,220 contracts on the CME copper contract HGcv1 as of last Tuesday, according to the latest Commitments of Traders Report.

That compares with a peak year-to-date short of 58,557 contracts in the week ending Feb. 14, when the copper price first started tumbling as the market realised the coronavirus was not going to be just a Chinese story.

There has been no significant change in fund long positions. At 29,422 contracts bull bets are as low as they've been since 2016, a significant historical marker given that was a cyclical trough in industrial metal prices.

What has changed is the number of outright short positions held. These have been slashed from a mid-February peak of just over 100,000 contracts to a current 53,642. Short-covering has been the dominant feature for the last couple of weeks.

This has no doubt been part of the broader dash for cash by fund managers the world over.

It also coincides with the copper price steadying after its precipitous collapse in the first half of March. London Metal Exchange (LME) copper hit a four-year low of $4,371 per tonne on March 20, but closed out last week at $4,840.

However, the funds' retreat from copper also appears to reflect wider exhaustion with a volatile market that is generating divergent price signals at breakneck speed.

Both the CME and the LME saw futures and options volumes surge last month to the tune of 26% and 12% respectively.

March though was very much a month of two halves, with the first part characterised by heightened trading activity and the second by lower volumes and slumping open interest.

Open interest on the CME copper contract stood at 182,253 contracts at the end of the month, the lowest it has been since May 2016.

LME copper open interest has collapsed from nearly 435,000 lots at the end of January to a current 354,200.

LME copper volumes averaged 164,400 lots per day in the first three weeks of March. But turnover slumped to an average 107,700 lots in the last week of the month.

Many market participants would appear to agree with the advice of LME brokerage Kingdom Futures. Its daily client note this morning cautioned that "unless you have to be involved in the metals markets, it is probably a good time to stand aside and watch events unfold."

FLUID FUNDAMENTALS

And there's a lot of watch.

Copper traders are trying simultaneously to track both highly dynamic demand and supply drivers

There should be no doubting the scale of the demand shock coursing through the world's industrial nations. Purchasing managers indices (PMI) just about everywhere have collapsed as manufacturing activity goes into deep freeze.

The one exception is China, where life is slowly getting back to something close to normal after an apparently successful containment of the coronavirus.

However, relief that the world's largest copper consumer is recovering has to be tempered by the fact that a lot of the metal it uses goes towards making stuff for export.

Headline bounces in China's March PMIs masked weakness in the export orders component of both the official and Caixin indices. 

Then there is the supply side.

The nature of this crisis is that supply hits are accumulating at a much faster rate than in previous copper crises.

Producers are normally slow to react to falling prices but this time many have no choice but to scale back operations as a growing number of countries initiate quarantines and lockdowns.

There are restrictions on mining operations in both Chile and Peru, two of the world's largest producing nations and key suppliers of raw materials to Chinese smelters.

In Chile major operators have reduced manpower at their mines by 25-30% in a bid to halt the virus, with low prices now compounding the situation at smaller miners, according to industry group Sonami. 

And this being copper, supply is also subject to totally unexpected events such as the earthquake that rocked U.S. producer Kennecott's operations last month.

Rio Tinto, which owns Kennecott, has declared force majeure after an emergency shutdown of the smelter, which last year produced 168,000 tonnes of refined metal. 

Assessing a market balance in the face of such fast-moving events is very much a work in progress. The consensus is that the demand shock will be bigger than the supply shock, but by how much is a moot point.

NEWS FATIGUE

Underpinning everything is the news flow around the spread of the coronavirus.

Since this is a global phenomenon with its own fast-changing dynamics, attempting to understand its economic impact means monitoring just about every country on earth.

It's not just copper that is suffering from news fatigue - witness the heightened volatility across the full spectrum of financial markets.

Moreover, copper is dependent on other parts of that universe such as energy and currencies, both of which feed into the copper cost curve, a key determinant of whether miners will reduce or close operations.

It's all very confusing.

The funds seem to have decided for now it's all just too confusing.

(Editing by Jan Harvey) ((andy.home@thomsonreuters.com, 44-207-542-4412 and on Twitter https://twitter.com/AndyHomeMetals))