(The opinions expressed here are thoseof the author, a columnist for Reuters)
By Andy Home
LONDON, Aug 6 (Reuters) - Typical, isn't it?
Copper bulls have been waiting all year for a strike andalong come three potential Chilean flashpoints in the space of aweek.
The main union at the Caserones mine is threatening to walkoff the job on Tuesday if government mediation fails to generatea breakthrough in deadlocked talks.
Unions at Escondida have rejected an offer on a new labourcontract, raising the prospect of another walk-out after lastyear's 44-day strike at what is the world's largest singlecopper mine. Meanwhile, workers at Chilean state copper producerCodelco's Chuquicamata division staged protests last week in along-simmering dispute over restructuring plans.
None of which helped the copper price, which closed Fridaydown on the week and has on Monday morning slipped furthertowards the $6,000 per tonne technical cliff-edge.
London Metal Exchange (LME) three-month metal waslast trading around $6,100.Doctor Copper, it seems, is far more worried about thepotential hit to demand resulting from the escalating tradedispute between the United States and China.
But is he exaggerating the threat?
BULLISH COCKTAIL Copper bulls came into 2018 with high expectations of supply disruption from the multiple labour contract expiries at some ofthe world's biggest mines.
The first half of the year, however, brought next to zerodisruption from labour strife or anything else for that matter.World copper mine output grew by six percent inJanuary-April, according to the International Copper StudyGroup. This, by copper's standards, is a remarkably strongsupply performance.
So you'd think there would be some bullish price reaction tothe current Chilean disputes covering around 1.4 million tonnesof annual production capacity.But last week's news flow did no more than pause a sell-offthat began in the middle of June and which has seen copper slumpby 18 percent from the highs above $7,300 per tonne.
Nor has the price drawn any comfort from bullish signals emanating from the physical market.
Global visible inventory has fallen for four consecutivemonths. In both June and July all three major exchanges - LME,CME and the Shanghai Futures Exchange (ShFE)- registered falls,which is a rare occurrence.Physical metal continues to flow at a fast pace into China,the world's largest buyer.
Imports of unwrought copper in June were up 15 percent onJune 2017, while cumulative first-half 2018 imports rose by over16 percent.At other times, this would amount to a potent bullishcocktail.
Right now, though, none of it seems to count.
TRADING TARIFFS What's moving the copper price downwards is the threat of future economic slowdown resulting from escalating tradetensions.
The Trump administration may have dialled down its stand-off with the European Union, for now at least, but it is ratcheting up the pressure on China.
The United States and China implemented tariffs on $34billion worth of each other's goods in July with tariffs onanother $16 billion of trade expected imminently.The United States is looking at yet another $200 billionworth of Chinese imports to target, while China has respondedwith its own proposed tariffs on 5,207 goods imported from theUnited States worth $60 billion. Neither side shows any sign of backing down. President Donald Trump tweets that import tariffs on Chinesegoods are "working far better than anyone ever anticipated".
Official Chinese media respond by accusing Trump of starringin his own "street fighter-style deceitful drama of extortionand blackmail". The dollar is up, the yuan is down and Dr Copper is warningus that this could end up very badly. At one level he is right.Copper's fortunes are beholden first and foremost to thestrength of demand in China. This was already looking questionable before the tradedispute took fire, meaning any tariff-related concerns areacting to amplify existing worries about a cyclical slowdown inthe Chinese economy.
This is particularly evident in the Shanghai copper market.Open interest on the Shanghai Futures Exchange (ShFE)contract has been sliding since March of this year asspeculators left copper in search of more promising markets suchas still-booming iron ore.
The latest sell-off has been accompanied by high volumes andopen interest falling to its lowest level since 2017, suggestingthat the last bulls, including the mega bull that was GelinDahua, have also thrown in the towel. As these structural positions get cleared out, trading hasbecome increasingly beholden to the twists and turns of thetrade dispute.Buyers step in when the trade rhetoric softens only toreverse out when it ratchets up again.
NEW FRIENDS Speculators elsewhere are using copper to express theirnegative macro views.Funds have switched net positioning from mega long to megashort on the CME copper contract in superfast time.
The net money manager position stood at 77,740 contracts inthe middle of June. As of the end of July it was net short tothe tune of 26,350 contracts, a level not seen since September2016.Both the outright positioning levels and the speed of changeare almost unprecedented.
That's because fund capacity in the U.S. copper market hasexperienced a step-change over the last couple of years.The bullish positioning seen over the course of 2017 brokeall previous records. Even that mid-June position would havebeen an all-time record before the historical yardstick startedchanging towards the end of 2016. The identity of Dr. Copper's new fund friends is ahotly-discussed topic in the market.
The best collective guess is that they are a combination ofnew systematic players joining the copper market and aspill-over of Chinese players looking for arbitrageopportunities.The latter may have found another vehicle to trade a bearview of the Chinese economy, while the former are simply chasingthe momentum of a falling price.
It remains to be seen whether together they are capable ofaccumulating the sort of record positions on the short side thatthey built on the long side last year.However, the effect is to amplify any existing trend, whichright now is firmly downwards.
Dr Copper may well be sounding a timely warning as to wherethe global manufacturing economy may be heading. Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.