Article / 14 January 2015 at 10:14 GMT

Copper joins the global commodity rout

Head of Commodity Strategy / Saxo Bank
Denmark
  • Copper tumbles by nearly 9% in Asian session
  • World Bank downgrade cites decreased Chinese demand
  • Bloomberg commodities index hits a 12-year low

By Ole Hansen

Copper tumbled almost 9% in Asia after being hit by a double dose of bad news. First we had the technical break below $6,000/tonne yesterday on the London Metal Exchange which was followed by a global economic downgrade from the World Bank. 

The downgrade specifically mentioned a slowdown in China as one of the reasons for the downgrade. This highlights copper's vulnerability, as more than 40% of global output is being consumed in China.

LME Copper
LME Copper rout
Source: Bloomberg

The rout seen among other commodities during the past six months — not least in crude oil but also iron ore and some agriculture products — has now spread to industrial metals. This sector (just like crude oil) has seen supplies rise in response to the high prices witnessed up until a few years ago. 

The combination of rising supply, weaker demand and a rising dollar has seen the Bloomberg Commodity index reach a 12-year low, thereby almost wiping out most of the gains seen during the previous decade.

The decade's gains, of course, were primarily driven by China's insatiable appetite for raw materials to drive its economy forward.

Bloomberg Commodity Index
Bloomberg Commodity Index, monthly
Source: Bloomberg 

According to data from the London Metal Exchange, for much of 2014 a single firm owned between 50% and 80% of the copper stored in warehouses registered with the exchange. In the latest data for December 29, two firms held 40% to 50% each. 

The near-13% price collapse since then will raise speculation about how and whether this metal has been hedged. If not, further downside risk from long liquidation can not be ruled out. 

Speculative positioning

Hedge funds have held a negative view on copper for the past three months but as the weekly data from the CFTC show, the conviction rate has been rather small. As of last Tuesday, funds held a net-short position in High Grade Copper futures and options of 11,000 lots (275 million pounds). 

During the past year, the biggest net-short was seen last March and at 25,000 lots back then — there is plenty of room for some additional selling. 

Speculative position in HG Copper
 
-- Edited by Michael McKenna

Ole Hansen is head of commodity strategy at Saxo Bank – the home of social trading

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