Short Squeeze
The disconnect between the Chinese market and western investors had been building for several months. Investors and analysts fell over one another to make the most bullish prediction for copper prices amid forecasts of soaring demand from the energy transition, and challenges boosting mine production. A series of reports estimating massive amounts of copper needed for artificial-intelligence data centers added to the frenzy.
Goldman Sachs Group Inc. said copper was in “the foothills of what will be its Everest,” predicting prices would average $15,000 a ton next year, while Andurand called for copper to hit $40,000.
The situation came to a head in May. As copper prices in China lagged international prices, many domestic traders had been placing bets that the gap would narrow, going short the international copper contracts and long the Shanghai market. After their brokers refused to put on new short positions in London to avoid being exposed to volatility during a week-long Chinese holiday, some traders placed bearish bets on the Comex in New York instead.
But as investor money kept piling in to the market, particularly US copper futures in New York, the Chinese traders were caught in a short squeeze. Faced with rising copper prices, their cash flow was running out and they had no choice but to give up, causing an unprecedented blowout in New York futures that saw them trade far above other price benchmarks.
Since then, however the Chinese market has reasserted itself.
Chinese copper exports hit a record 149,000 tons in May. LME stocks in South Korea and Taiwan — the locations closest to China — have been rising. And traders have been rushing to ship copper to the US to arbitrage the difference in prices — though none of it has yet appeared in Comex-registered inventories.
‘Not There Yet’
In compiling this account, Bloomberg spoke to more than a dozen senior figures in China’s copper trading industry, most of whom who asked not to be identified discussing private information.
Many of the traders gathering in Hong Kong this week will still be nursing their wounds. The past six months could be among the worst performing period in their copper trading careers, several said.
For the wider market, the key question is what happens next.
In China, some traders say there have been tentative signs of a pick-up in buying in the past couple of weeks, a move which, if sustained, could put a floor on prices. Inventories of copper on SHFE have fallen for the past two weeks, albeit by a modest 14,000 tons. Beijing is also set to announce more long-term policy support for the economy at a key Communist Party meeting next month, which is seen boosting demand for raw materials like copper.
Wang Wei, general manager at major copper trader Shanghai Wooray Metals Group Co., which sells refined copper to hundreds of Chinese fabricators, said that demand was “rebounding a bit,” although only to return to similar levels as a year ago.
But there are still reasons to worry about China’s underlying copper consumption. Property is a key driver of copper demand, and the weakness in the Chinese sector is likely to continue as a drag, according to Eugene Chan, trading manager at Zhejiang Hailiang Co. There are also some indications that high prices are spurring a greater push for substitution of copper for aluminum.
“The financial market flood of net new length has become a trickle. Without that incremental macro-driven buyer, it comes down to whether the underlying physical market can support the current price,” said Colin Hamilton, managing director for commodities research at BMO Capital Markets. “We have to reset to a level to bring these buyers back, and we’re not there yet.”
Hedge Funds’ Bullish Copper Bets Run Into China’s Slowdown (yahoo.com)