The weight of long copper positions on the London Metal Exchange has eased as prices have fallen, but traders are unwilling to heavily short in the current volatile price environment, market participants told Metal Bulletin.
While a surge in money managing activity in the fourth quarter of 2016 resulted in record long copper positions being added to London Metal Exchange contracts, weaker longs have been flushed out and others may tire as the first quarter of 2017 approaches.
The LME commitment of trade reports (COTR) for the week ended December 16 showed the money managers’ long position fell 2,072 lots to a net 77,119 lots.
Prior to last week, the money-manager position had been at a record high after seven consecutive weeks of increases.
On November 15, the three-month copper price broke above $6,000 per tonne for the first time since June 2015, then retraced to $5,360 before rebounding and hitting fresh highs of $6,045.
Three-month copper was recently trading around $5,500 per tonne, following substantial flows into LME sheds throughout December.
“Copper is risky as the record length on positioning data would normally see a reversal as people would see it as an opportunity to drag prices down on stop-losses. But, in fact, it rebounded [after the initial November fall] and you can’t bet on a sharp retracement,” Vivienne Lloyd, an analyst at Macquarie, told Metal Bulletin.
The speed and steepness of the recent price rise surprised many as they said it did not reflect the fundamentals.
While the fundamental picture has improved – Goldman Sachs now expects a 2017 deficit of 180,000 tonnes, compared with a previous forecast of a surplus of 360,000 tonnes – the recent turnaround in sentiment has mainly been attributed to speculator activity.
Speculator activity has since eased but to short the market now is seen as hazardous – even if traders do not believe the price deserves to be higher.
“A common phrase I hear is, ‘I am not standing in front of that train’ – No one will be aggressive in shorting, but we could still see some modest shorts as people see it as an opportunity,” Lloyd said.
“People will want to buy the dips to either get long or increase long positions. You have to be very brave to be short – some do not believe that [the price rise] can last and want to short it lower, but it’s risky,” Robin Bhar, an analyst at Société Générale, said.
Hope of higher prices
After five years of a bear market, participants are more optimistic that the environment is improving with hopes of better Chinese demand and higher prices next year.
Copper prices slumped in the first half of the year after they were heavily shorted – primarily due to Chinese funds and option activity.
“A massive number of Chinese were short-volatility selling in the summer, which was self-fulfilling and the rally created a lot of pain,” a senior LME cat I member said.
“The fundamentals are out of whack, but others are putting their money to work – and ships rise on that tide,” he said.
Another said that there was hope that the hedge funds and western banks would reverse their trend of exiting commodities and come back in.
“We could see a rethinking on metals,” he said.
Business has slowed as the year-end approaches, and prices are likely to drift amid book squaring, while participants are less inclined to expose themselves to risk.
“Those people who have made decent profits will be a lot more conservative. I do not think we will see the swarms of funds that we have seen […] It requires a spark, and I don’t think there is the opportunity,” Lloyd said.
Sentiment is brighter
But, looking to the first half of 2017, sentiment certainly appears a lot brighter than it was in January this year, when three-month copper was trading at $4,318 per tonne.
“I think we have seen the lows – there is more optimism in the market now – [the move higher] is looking overdone and overextended but the market is still brighter,” a second senior cat I member said.
Most notably, Goldman Sachs – one of the most vocal bears in recent years – reversed its stance earlier this month and shifted to a more bullish tone.
“Although it is tempting to blame this [price spike] on speculative positioning, the materially stronger fundamental developments that contributed to this surge in speculative interest are likely to underpin a more bullish environment for copper pricing through at least the first half of 2017,” it said.