RED FLAG: Why global investors should be watching the copper price

Commodity traders are betting that the copper price will continue to plummet – and investors around the world should be taking notice.

For decades, the red metal has been viewed as a barometer for the state of East Asian economies, and by extension, the global economy at large.

According to the London Metal Exchange, there are now more bearish positions than bullish positions on the copper futures markets, now numbering over 56,000 shorts to 38,900 long contracts.

image copper price

Is ‘Doctor Copper’ always right?

The red metal has been nicknamed “Doctor Copper” for its ability to predict turning points in the global economy. That’s because copper is a widely used industrial metal, crucial in construction, manufacturing, and electronics. 

Copper prices are even more closely correlated with the health of East Asian economies, including China. The latter is currently the largest consumer of the red metal in the world, accounting for 52% of the world’s global copper demand.

The latest data shows that prices for Benchmark LME copper are sitting around $8,031 per tonne. While up almost 17% since hitting a 20-month low in July, that’s still down more than 25% since hitting a record-high of $10,845/tonne in March.

image 1 copper price

Since then, the number of traders and funds shorting copper has drastically eclipsed the number of long contract holders.

“Funds have been building up short positions in anticipation of recession,” said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.

The situation in China

While experts aren’t expecting a full-blown recession necessarily, many are predicting things might get worse in China before they get better. 

Recent consumer and factory data for the month of July missed expectations, while retail sales grew at a snail’s pace of just 2.7%, well below the 5% forecasted by a Reuters poll. 

Industrial metal prices are weighed down by the state of the property market, where YTD residential sales fell by 31.4%. That’s also not to mention reports that China’s Covid-19 cases rose to a three-month high recently, yet another factor weighing down copper prices.

On the bullish side, copper inventories in China are currently at a low, with Yangshan copper import premiums rising to $102.50 per tonne, the highest price seen since December.

The ‘new oil’ of the 21st century

Although the short-term prognosis seems more bearish, there are a lot more reasons to be bullish over the long term. 

Besides its construction and manufacturing applications, copper’s a critical material in most green energy technologies, like solar panels and wind turbines. 

It’s one reason why the red metal has already been nicknamed “the new oil” of the 21st century by Goldman Sachs, with the bank expecting a long-term price target of over $15,000 by 2025.

Copper’s facing a long-term supply crunch, expected to hit an 8.2-million-ton deficit by 2030. That’s twice the size of the gap seen in the historic copper bull market of the early 2000s.

“The market is already tight as pandemic stimulus (particularly in China) have supported a resurgence in demand, set against stagnant supply conditions,” reported Goldman Sachs at the time.

Despite these long-term reasons to be bullish, speculators seem convinced that copper prices are set to fall. If the Chinese economy continues to show weakness, then that most certainly will be the case.

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