What Are Commercial Traders Telling Us About the Price of Copper?

The CFTC offers a weekly net commitment report of non-commercial and commercial traders of copper futures amongst other markets.

The commercials are predominated by industrial users who will typically be long the futures and producers who will look to be tactically short to hedge price downside risks. As such for the commercials to be net short overall the large copper producers need to be sufficiently short so as to overwhelm the long bias of the industrial users and typically they are only going to do this when they see the copper price as excessive.

On the other hand the non-commercials are principally made up of long-only investors and traders going long or short the market.

The net exposures of these two groups of participants necessarily need to more or less offset.

So where are these two groups positioned on a net basis now and what might it indicate about the next six months or so for the price of copper and by inference the other base metal markets?

Considering the last few years’ worth of prices and positioning a few salient points can be made:

1. The commercials have recently gone to a record net short positioning in the period considered, while the non-commercial net long exposure has gone to almost a record high.
2. The last time the commercials had this order of a net short exposure was July 2008, and copper prices subsequently fell over 65% in the following 5 months.
3. Previously, in the period above, when the commercials have built substantial net long or short exposures it has turned out to have been a remarkably prescient call on the subsequent direction of the copper price.

Another factor in the copper market, similar to most of the other base metals markets, is the remarkable recent build in warehouse inventories:

Copper prices in the period above have also shown a marked correlation with physical market tightness as proxied by the warehouse inventories, despite the post-2003 environment being characterised by significant long-only investment flows into commodity futures.

So in summary there are clearly two camps. The investors that are buying are apparently doing so on an allocation view that there is an inventory restocking cycle coming in 2010 in the G7 as growth rebounds or that going long on commodities is a good short US Dollar play.

On the other hand the commercials are selling copper futures ostensibly with the view that the current prices more than compensate them if there is a Lazarus-style recovery in the G7 next year, whilst the current inventory level will hang over the market and likely depress prices if there is a muddle-though scenario, while a double dip outcome will likely represent another record pay day.

So the question is which camp is right? Is it the archetypal Wisconsin pension fund manager who is buying copper on an 'allocation view' or as part of a V-shaped recovery play or is it the traders working for the large global mining companies who are trying to sell their copper to actual industrial users every day?

Disclosure: No positions

Comments

[granger]

great info thank you, I have only been following Dr Copper the last few years but this would seem to be very valuable

2009 Nov 27 05:19 PM

[fwi]

Brilliant call! THe image of the Wisconsin pension manager (and his very probable limited knowledge of the copper market) and the down in the trenches mining trader told the whole story.

2009 Nov 28 03:03 PM

[Greg Merrill]

Not only are the commercials net short, but the worldwide inventory levels keep rising.

merrillovermatter.blog...

Good information, thanks Kentpaul!

2009 Nov 30 01:43 PM