METAL
Copper´s bull momentum from the start of the year is fading as the disruption premium from supply hits at the world´s two largest mines unwinds and broader risk-off turbulence also joins the mix.
Three-month copper on the London Metal Exchange (LME) slid through $5,600 last week to hit $5,568.50 a tonne, its lowest level since January.
And though it staged a small bounce later in the week, at $5,630 copper´s year-to-date gain stands at a little more than 2 percent, having been up almost 11 percent in February.
On the supply side, a strike at Escondida in Chile has ended, albeit after a longer than expected 43 days, while a temporary compromise on export shipments should allow the Grasberg mine in Indonesia to ramp up towards more normal operating rates.
There is no shortage of potential further flashpoints in the supply chain, but for now copper is drifting.
Unsurprisingly, the weaker tone in pricing has seen a significant tempering of fund long positioning in the market.
What´s curious, though, is that funds remain as committed as they are, particularly on the CME´s copper contract.
Has CME tapped a whole new source of managed money? Or is it part of a bigger rotation of funds into the commodity sector? Or maybe a bit of both?
The latest Commitments of Traders Report (COTR), covering trading to April 11, showed funds holding a net long position of 55,512 lots on the CME´s copper contract.
That´s a sharp reduction from the peak of 101,139 contracts registered in the last week of January.
Expressed in terms of open interest, funds have trimmed net long positioning from almost 35 percent to 19 percent over the same time frame.
In broad terms the same unwinding of speculative length has played out in the London market.
The LME´s own COTR shows funds net long at 58,593 contracts as of April 7, down from a peak of 80,478 contracts in mid-December.
None of which is surprising, given that the money manager category in both reports captures the Commodities Trading Advisor (CTA) community, large parts of which use trend-following algorithms.
This means that positioning often tends to follow price evolution.
A period of price drift, such as seen over the past few weeks, will tend to translate into fewer longs and more shorts.
What is surprising, though, is that funds are still as long as they are in both markets.
Strip out the past six months and that LME long position would be the largest since the exchange started publishing its reports in 2014.The historical comparison is even more telling when it comes to the CME because the U.S. COTR has a much longer history.
Ignoring the past few months, the current net length of 55,512 lots dwarfs anything seen in the past.
Prior to the fourth quarter of 2016 the highest collective net long position had been 48,994 lots in July 2014, when copper was trading either side of the $7,000 level.
To an extent, funds´ commitment to copper is part of a broader pattern of re-engagement with the commodities sector.
LME aluminium, for example, is a current favourite of money managers, with net length higher than copper in both outright size (197,857 contracts) and relative to open interest (21 percent), as of April 7. As with copper, there is an evolving story to buy into as the market tries to work out the impact on aluminium production of China´s increasingly draconian environmental controls.
But beyond specific narratives, there does seem to be a broader rotation of fund money into commodities as correlations with other asset classes break down and benchmark commodity indices return to positive territory after several years of underperformance.
Goldman Sachs, for example, notes that its "2017 top trading recommendation", being long the GSCI commodity index, is showing a return of about 7 percent.
The bank retains its overweight commodities stance on a three-month and 12-month time horizon.
Meanwhile, claims that its exchange-traded fund (ETF) tracking the Bloomberg Commodity Index has taken in $1 billion since its launch in January, making it the "most successful ETF launch in the past five years".
Analysts at Citi estimate that cumulative inflows to the commodities sector totalled about $8 billion in the first quarter, albeit with a significant part of that flowing into precious metals.
But if funds are indeed returning to commodity markets, either they are doing so with a degree of enthusiasm not hitherto seen in the CME copper contract or there are simply more of them.
It´s noticeable that rising money manager positioning on the CME has coincided with a steady increase in activity.
CME copper volumes, futures and options combined, surged by 27 percent last year and a further 25 percent in the first quarter of 2017.Futures open interest surpassed 300,000 contracts for the first time on Feb.
13 and has been running above 200,000 contracts since October last year.
It is evident the exchange has been winning more copper business and, by inference, a lot of it has come from the fund community. But which fund community?Only the CME itself will know the answer to that question, but the general perception is that its copper contract is drawing in new Asian players, including an element of Chinese investment.
Which itself is interesting since the one market not to show any signs of speculative length is the Shanghai Futures Exchange.
Copper volumes and open interest were down 41 percent and 32 percent respectively in the first quarter and recent patterns suggest, if anything, that speculative players are increasing short positions.
Copper is in a state of flux right now, with prices caught between competing bear and bull drivers.
But it seems that fund participation in the copper market is also in a state of flux, with the rise in length on the CME suggesting something more than just cyclical rotation of investment money.
Whether the new money obeys the same rules as the old money remains to be seen, but it injects a whole new layer of uncertainty into an already highly uncertain pricing outlook.
The writers is a columnist for Reuters.
