In my December 2018 article on copper, I arrived at the following conclusion:
“In my opinion, the COT data confirms a thesis that the copper market is building a base for a new leg up”
Unfortunately, due to the shutdown of the U.S. government, for the last two months the U.S. Commodity Futures Trading Commission suspended the publication of the updated COT reports, leaving investors/speculators unaware of the latest developments on the copper futures market. Thankfully, since March 8, 2019, everything has come back to normal and I am able to provide my readers with the updated data. And since my last article, the copper market has changed dramatically.
Firstly, a quick look at the big picture:
I guess it is easy to spot that between mid-August 2018 and mid-February 2019 copper prices were consolidating (the area marked in light orange). Put differently, despite a very volatile market, in the medium-term perspective copper prices went nowhere.
Now, a closer look at the COT data shows a very interesting picture. Namely, during this pretty long consolidation phase, the speculators trading copper futures were very busy. Here is what they were doing:
- The bears (the speculators betting on lower copper prices) reduced their bearish bets by 17 thousand contracts.
- The bulls (those betting on higher copper prices) increased their position by 8 thousand contracts.
- As a result, the total net short position held by copper speculators was reduced from 31 thousand contracts to 6 thousand.
In other words, shortly before a final breakout (the red arrow on the chart above), the speculators trading copper futures still held a net short position... but they were much less bearish than at the beginning of the consolidation period.
In mid-February 2019, the price of copper broke above its medium-term resistance level (red, horizontal line on the chart above), holding above it since then. As a result, the former resistance was converted into a support level (the green, horizontal line). How did the speculators react to this breakout? Well, as expected, over the last three weeks the bears were leaving the market, cutting their bets by 16 thousand contracts. The bulls did the opposite thing, increasing their long position by 13 thousand contracts. As a result, the net position held by copper speculators was converted from SHORT (6 thousand contracts) to LONG (23 thousand).
To summarize, within a few weeks the sentiment among the speculators trading copper futures has changed from pessimism to optimism. Does it mean that the red metal is in a full-blown bull market now? Well, not so fast. We have to remember that the current leg up has been so far dominated by the bears leaving the futures market: the balance is 16:13 (a change of 16 thousand contracts on the bear side compared to 13 thousand contracts on the bull side). As a result, I think that copper is at an initial and very volatile phase of a new bull cycle called a short-squeeze (dominated by the bears liquidating their losing positions). However, if my long-term bullish stance on copper is correct, pretty soon we should see the bulls dominating the market and pushing the prices of the red metal significantly higher.
Although most recently the global stocks of refined copper (reported by the Shanghai Futures Exchange, COMEX and LME) have gone up, the general trend is clear - down (the red arrow on the chart below):
(Source: Simple Digressions)
As the chart shows, since the last cyclical top established in March 2018, the stocks decreased by 49.1% so far. Interestingly, although over the last two months they went up, the entire growth was attributable to China; the stocks reported by the COMEX and LME are still going steeply down, and on March 8, 2019, they reached another cyclical bottom. Simply put, it looks like there is no copper in the West and rather a little in China. Definitely, it is a good indication of strong copper fundamentals.
China is the world’s largest importer of copper, so investors/speculators interested in the red metal should closely monitor the country’s economic activity, its demand for copper, etc. And generally the Chinese economy is slowing down, last year reporting one of the lowest growth rates in history (6.4%). However, it looks like even such a "small" growth rate is big enough to keep the copper demand at a decent level. For example, as the chart below shows (the panel on the left), in January 2019 China imported nearly a record amount of copper concentrates and raw ore (the green circle):
(Source: HKTDC Research and Simple Digressions)
What's more, although the official spot treatment charges for the second quarter of 2019 are not available, the so-called China Smelters Purchase Team (a group of the largest Chinese smelters) currently offers charges of ¢8.1 per pound of copper concentrate, well below the 3Q 2018-1Q 2019 figures (the panel on the right). This figure contrasts sharply with the rising stocks of refined copper (discussed in the section “Physical market”), but in my opinion, the final conclusion is definitely bullish:
Higher imports of copper concentrates and ore plus lower treatment charges for copper concentrates outweigh the slightly higher stocks of refined copper and are a clear indication that Chinese demand for copper is strong.
In my opinion, the latest breakout of copper prices looks like a typical short-squeeze. If I am correct, Dr. Copper is at an initial stage of a new, long-term bull market. This thesis is supported by the dropping global stocks of refined copper and strong Chinese demand for copper concentrates and raw ore.
However, I think that we are still ahead of a very strong leg up (dominated by the bulls), so the current price weakness (at the time of writing this article copper prices are down 1.5%) looks like a very decent buying opportunity.
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Disclosure: I am/we are long CEF, GDX, KL, SAND, ARREF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.