Copper bulls have been waiting all year for a strike and
along come three potential Chilean flashpoints in the space of a
week.
The main union at the Caserones mine is threatening to walk
off the job on Tuesday if government mediation fails to generate
a breakthrough in deadlocked talks.
Unions at Escondida have rejected an offer on a new labour
contract, raising the prospect of another walk-out after last
year`s 44-day strike at what is the world`s largest single
copper mine. Meanwhile, workers at Chilean state copper producer
Codelco`s Chuquicamata division staged protests last week in a
long-simmering dispute over restructuring plans.
None of which helped the copper price, which closed Friday
down on the week and has on Monday morning slipped further
towards the $6,000 per tonne technical cliff-edge.
London Metal Exchange (LME) three-month metal was
last trading around $6,100.
Doctor Copper, it seems, is far more worried about the
potential hit to demand resulting from the escalating trade
dispute between the United States and China.
But is he exaggerating the threat?
BULLISH COCKTAIL
Copper bulls came into 2018 with high expectations of supply
disruption from the multiple labour contract expiries at some of
the world`s biggest mines.
The first half of the year, however, brought next to zero
disruption from labour strife or anything else for that matter.
World copper mine output grew by six percent in
January-April, according to the International Copper Study
Group. This, by copper`s standards, is a remarkably strong
supply performance.
So you`d think there would be some bullish price reaction to
the current Chilean disputes covering around 1.4 million tonnes
of annual production capacity.
But last week`s news flow did no more than pause a sell-off
that began in the middle of June and which has seen copper slump
by 18 percent from the highs above $7,300 per tonne.
Nor has the price drawn any comfort from bullish signals
emanating from the physical market.
Global visible inventory has fallen for four consecutive
months. In both June and July all three major exchanges - LME,
CME and the Shanghai Futures Exchange (ShFE)- registered falls,
which is a rare occurrence.
Physical metal continues to flow at a fast pace into China,
the world`s largest buyer.
Imports of unwrought copper in June were up 15 percent on
June 2017, while cumulative first-half 2018 imports rose by over
16 percent.
At other times, this would amount to a potent bullish
cocktail.
Right now, though, none of it seems to count.
TRADING TARIFFS
What`s moving the copper price downwards is the threat of
future economic slowdown resulting from escalating trade
tensions.
The Trump administration may have dialled down its stand-off
with the European Union, for now at least, but it is ratcheting
up the pressure on China.
The United States and China implemented tariffs on $34
billion worth of each other`s goods in July with tariffs on
another $16 billion of trade expected imminently.
The United States is looking at yet another $200 billion
worth of Chinese imports to target, while China has responded
with its own proposed tariffs on 5,207 goods imported from the
United States worth $60 billion.
Neither side shows any sign of backing down.
President Donald Trump tweets that import tariffs on Chinese
goods are "working far better than anyone ever anticipated".
Official Chinese media respond by accusing Trump of starring
in his own "street fighter-style deceitful drama of extortion
and blackmail". The dollar is up, the yuan is down and Dr Copper is warning
us that this could end up very badly.
At one level he is right.
Copper`s fortunes are beholden first and foremost to the
strength of demand in China.
This was already looking questionable before the trade
dispute took fire, meaning any tariff-related concerns are
acting to amplify existing worries about a cyclical slowdown in
the Chinese economy.
This is particularly evident in the Shanghai copper market.
Open interest on the Shanghai Futures Exchange (ShFE)
contract has been sliding since March of this year as
speculators left copper in search of more promising markets such
as still-booming iron ore.
The latest sell-off has been accompanied by high volumes and
open interest falling to its lowest level since 2017, suggesting
that the last bulls, including the mega bull that was Gelin
Dahua, have also thrown in the towel. As these structural positions get cleared out, trading has
become increasingly beholden to the twists and turns of the
trade dispute.
Buyers step in when the trade rhetoric softens only to
reverse out when it ratchets up again.
NEW FRIENDS
Speculators elsewhere are using copper to express their
negative macro views.
Funds have switched net positioning from mega long to mega
short on the CME copper contract in superfast time.
The net money manager position stood at 77,740 contracts in
the middle of June. As of the end of July it was net short to
the tune of 26,350 contracts, a level not seen since September
2016.
Both the outright positioning levels and the speed of change
are almost unprecedented.
That`s because fund capacity in the U.S. copper market has
experienced a step-change over the last couple of years.
The bullish positioning seen over the course of 2017 broke
all previous records. Even that mid-June position would have
been an all-time record before the historical yardstick started
changing towards the end of 2016.
The identity of Dr. Copper`s new fund friends is a
hotly-discussed topic in the market.
The best collective guess is that they are a combination of
new systematic players joining the copper market and a
spill-over of Chinese players looking for arbitrage
opportunities.
The latter may have found another vehicle to trade a bear
view of the Chinese economy, while the former are simply chasing
the momentum of a falling price.
It remains to be seen whether together they are capable of
accumulating the sort of record positions on the short side that
they built on the long side last year.
However, the effect is to amplify any existing trend, which
right now is firmly downwards.
Dr Copper may well be sounding a timely warning as to where
the global manufacturing economy may be heading.
http://www.miningnewspro.com/en/News/233069/RPT-COLUMN-Dr Copper`s gloomy message is being amplified by new fund friends: Andy Home