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I am sure China didn’t intend to launch its new copper contract in the midst of so much speculative activity, but the maelstrom of investor interest in the copper market and the copper bull run at present certainly won’t harm volumes following the contract launch last week.
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Copper bull run and new Shanghai contract
The Shanghai International Energy Exchange (INE) launched its new contract allowing both domestic and international investors to trade copper in China. Similar to the metals traded on the SHFE, delivery is to take place in China with the contracts denominated in renminbi.
The launch of this contract is intended to boost China’s role in setting copper prices. As such, it will help it become a price maker rather than a price taker, Capital Economics wrote last week.
China both produces and consumes roughly half of all ferrous and non-ferrous metals globally. Thus, it makes sense it should develop a regional market for such products. As we have seen with the arbitrage play in aluminum this year, metals can move to very different dynamics within China relative to the rest of the world.
Copper’s 2020 rise
Copper has staged a spectacular recovery in 2020.
The metal has risen from a pandemic trough of $4,371 in March to euphoric highs of $7,331 — the highest level since June 2018, Reuters notes.
Strong demand in China has been a big part of the recovery in prices.
China’s increased imports of refined metal this year, driven in part by a significant increase in infrastructure spending, has boosted demand. Meanwhile, certain regions of the world, such as South America, have struggled to maintain output due to lockdowns.
But Reuters suggests a more significant contributor to the copper bull run is the bull story developing around European and North American “green deals.” Those deals have encouraged investors to buy into not simply a story of a pick-up in demand but a consumption revolution more akin to the BRIC investment boom of the 2000s.
Fundamental tightness
Goldman Sachs is quoted as saying that several commodities, including copper, are going to remain fundamentally tight through next year.
Demand is recovering fast, first in China and now increasingly in the rest of the world. A lack of investment is fundamentally constraining supply, which has been prevailing for some years.
Not surprisingly, investors have piled into the market, on the LME, Comex and the SHFE.
Reuters reports money managers have flipped from a collective net short of 19,000 contracts in March to a current net long of 38,000 contracts on the LME. Meanwhile, on Comex, money managers were net long of the copper contract to the tune of 78,865 contracts recently. Furthermore, market interest on the SHFE has risen from 294,000 contracts at the start of November to 367,000 in just three weeks.
Road ahead
Will the copper bull run continue?
Investors seem to think so, judging by their enthusiasm.
But you have to think a correction is due at some point.
Reuters quotes traders who voice similar caution. There are many moving parts in the copper market.
A surge in supply is probably the least likely end to the bull narrative. However, that does not mean price direction is a one-way bet next year.
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