I haven’t written about anything other than gold and silver in ages. And that’s on purpose. Base metals have been languishing, unable to attract investors despite strong fundamentals while the no growth shadow looms large.
That doesn’t mean I’ve stopped watching base metals. On the contrary: I pay close attention to copper and zinc because I know that, when they turn, lack of stockpiles and a dearth of new mines mean they will turn hard.
That turn is not close at hand. Unless Trump and Xi pull a magic rabbit out of a hat and produce a comprehensive trade deal, we will have to get through whatever slowdown or recession is coming before the market will turn its attention to base metals. At the end of the day, base metals make sense to investors in a growth environment, so we need to get back to that first.
That doesn’t mean the copper and zinc spaces are dead. Majors are still forward looking and are keeping an eye out for standout assets. I remembered that yesterday, when a corporate presentation I was perusing laid out a list of copper transactions in the last 10 years. It was a great reminder that good copper projects get bought no matter the copper sentiment (of course, investors enjoy better returns in a stronger market!).
And then I encountered this article from Reuters columnist Andy Home, who does great work tracking the metals markets. And it underlined that copper can offer opportunity before a real breakout.
With thanks to Home, let me offer a quick summary. Copper has been trading sideways for six months, the negative macro story drowning out the metal’s positive fundamentals (very small stockpiles, declining production, mine disruptions, and lack of new mines). Alongside that sideways market, funds established a huge short position on the CME copper contract (they placed big bets against copper price gains). Three months ago the short position was actually an all-time record in terms of bearish copper positioning.
The thing that’s changed recently is that short has shrunk. Shorts are down by a third in the last month while long positions – bets the price will rise – have almost doubled.
“These shifts in positioning…suggest the financial community is turning more positive on copper,” Home writes. At the recent LME conference in London copper was the favorite base metals and there was lots of talk about potential positive forces, such as low consumer and end-user inventories and protests in Chile, which produces a third of the world’s copper.
“In essence, funds are starting to bet that copper’s internal supply-usage dynamics will asset themselves over the macro uncertainties that have weighed down the price this year.”
And, if a trade deal of some sort clears away trade uncertainty: “Money managers [are] thinking about how copper might fare in the absence of that uncertainty, particularly is this year’s supply woes extend into next year.”
I don’t think the red metal is about to make a big move. I do think that there is broad awareness that copper is undersupplied in the medium term and faces a serious supply shortfall in the long term. That means investors attuned to metals are all watching and waiting for the moment it starts to turn; their pile in will send the sector soaring when it happens.
In the meantime, copper may be a growth story but it is also a commodity essential to modern life for which supply is always just meeting demand, which means it is always prone to impactful supply disruptions.
That combination – long term potential and near-term possibility – attracts speculators to the copper trade, who amplify the long and short positions that producers and end users have to take to hedge their products and needs.
The result is a market worth watching. As I said near the start, standout copper projects get bought no matter the state of the copper space. As such I’m watching a few exploration projects that might be onto something big.