Chinese funds add fuel to copper prices

Last week, the price of copper broke the US$9,000 per ton mark for the first time since 2011, and the booming rally showed no signs of abating.

The three-month copper price on the London Metal Exchange (LME) reached US$9,617 per ton on Thursday, close to the all-time high of US$10,190 set 10 years ago.

Driven by Chinese spot buying and a global green recovery dominated by metals, the copper market has been rising for 11 consecutive months, but a Chinese fund began to take the helm last week, when an investor invested $1 billion on copper prices.

Investors outside of China seem to be more ambiguous. Just as other funds begin to make profits, new funds enter the market. However, it seems that few people are ready to take the risk of short selling, although there is growing concern that the one-way bull market in copper prices should have a callback long ago.

One of the main obstacles to this is that the London market is shrinking, official inventories are low, and the time difference is tightening.

Chinese cattle

Obviously, some people in China have decided to use "long copper" to celebrate the Year of the Ox.

After the Spring Festival holiday, the Shanghai Futures Exchange (ShFE) copper trading market reopened, and the brokerage firm Shanghai Dalu Futures jumped to the top of the bull market ranking.

According to data from Refinitiv, as of last Friday, the company controlled by Zhongshan Securities Co Ltd held a long position equivalent to nearly 120,000 tons in contracts from April to July.

It also holds a long position of 20,000 tons in the Shanghai International Energy Exchange (INE) international copper contract.

The Shanghai Futures Exchange only announces long and short positions that exceed a certain level of open interest, which means that if the position is distributed between months with less liquidity, the position may be larger.

The final identity of the Shanghai copper large bulls is the source of much speculation in the market, and many people compare it to another large bull market led by Gelin Dahua Futures in 2018.

Continental Futures also quickly established a position on the Shanghai Futures Exchange's aluminum contract, indicating that it is making more extensive use of industrial metals.

However, this mysterious buyer is only the most prominent part of the speculative crowd in the Shanghai copper market.

In February of this year, the number of open positions on the Shanghai Futures Exchange contract surged from 277,000 to a one-year high of 378,401, which coincided with the latest round of price increases. Trading volume has soared to levels since 2015, indicating that retail investors are scrambling to participate in copper trading.

Fund establishes LME and cuts CME position

Although the bulls are running wild in Shanghai, the outlook for investment outside of China is more nuanced.

The London Metal Exchange’s (LME) investment fund’s net long position has risen to 47,897 contracts, the highest level since the exchange’s trader’s commitment report in the current format since the beginning of 2018. LME broker Marex Spectron estimates that On Thursday, speculative net long positions in the London market reached 62% of the open interest rate, the highest level since the peak of 75% in 2004.

However, this is not all one-way traffic.

Since reaching a peak of 43,212 contracts in October 2020, long positions held by the LME’s “other financial” category (including insurance and pension flows) have been steadily declining, falling further to 31,414 last week.

Also retreating are the Chicago Mercantile Exchange (CME) copper contract fund longs.

Despite higher prices, in the week ending last Tuesday (February 23), fund managers' net long contracts fell from 87,312 to 70,531.

This reduction seems to be a typical profit-taking, with direct long positions falling and direct short positions stabilizing at recent lows.

After the copper price continues to rise, the market is cautious about the possibility of a price correction. It is currently being expressed through the purchase of put options, and almost no one is prepared to take the risk of direct short positions.

London Squeeze

The ongoing squeeze on the London Metal Exchange (LME) copper market is strengthening the collective reluctance of people to stop the fast-rising bull market.

Short selling in a volatile and tight market is a terrible prospect for even the most adventurous funds.

The spot premium at the close of the LME benchmark three-month spread last week was US$62.25 per ton, which is the most tense period of spot premiums since the beginning of 2019.

Although more and more cash prices are encouraging people to deliver metals to LME warrants, LME inventories are still low. LME’s current inventory is 74,200 tons, a decrease of 31,600 tons from the beginning of January. A steady stream of passengers has been offset by the departure flights.

However, LME inventory is often whitewashed to deceive, and any further austerity measures will test the true level of availability.

As of December last year, 134,000 tons of copper were stored in an unauthorized shadow area of ​​the LME. Most of the inflows (99,000 tons) are located in Rotterdam. So far in 2021, the total authorized inflow in Rotterdam is only 3325 tons.

made in China

Chinese investors may have driven the latest round of this rally, but the market outlook in Shanghai is changing.

Inventories on the Shanghai Futures Exchange more than doubled in February to 147,958 tons, the highest level since October last year.

Inventories will always increase during the Spring Festival holiday, but the new physically deliverable copper contract will highlight the impact this year.

Last week, the bonded stocks registered with INE only jumped from 199 tons to 57346 tons, but it is not clear whether this is the result of new arrivals or existing stocks registered on the exchange.

Regardless, this new component of global inventories reinforces the feeling that China’s supply chain is beginning to replenish after a large amount of imports last year.

The rise in Chinese inventories will be a test of the long-term operation of mainland futures. Everyone remembers when the last time a Chinese fund held a position of this size. Green Dahua's bet did not bring good results to the fund and copper prices.