Copper Joins Hot Commodity Club as Chinese Punters Top Trump

  • ‘Move is driven out of Asia,’ says Guy Wolf of Marex Spectron
  • Goldman Sachs and Citigroup say prices have climbed too fast

Oil and Copper's Commodity Market Divergence

After shaking up iron ore, steel and coal futures this year, Chinese investors have taken on copper.

The metal used in cables and wiring jumped 11 percent last week, the most since 2011, as President-elect Donald Trump’s pledge to spend as much as $1 trillion on infrastructure boosted the outlook for demand. But the impetus for the surge probably had its origins elsewhere, namely in China.

In the four trading days through Monday, copper prices on the London Metal Exchange peaked between 10:30 a.m. and 6 p.m. Shanghai time, and declined during London and New York hours. The daily volume for copper on the Shanghai Futures Exchange reached 1.83 million contracts on Nov. 14, the highest in almost a year, and was more than three times the open interest, suggesting short-term speculation, according to Marex Spectron Group.

“The move is being driven out of Asia,” Guy Wolf, global head of market analytics at Marex Spectron in London, said on Monday. “The volume-to-open interest ratios on the SHFE are multiples of what we typically see on the LME. There is a huge amount of an intraday churn on Shanghai, relative to the LME and Comex. So to me, it’s more indicative of the existence of retail investors.”

China’s retail traders and funds have been buying copper in Shanghai since the start of November after the country’s exchanges boosted margins on other commodities, according to Citigroup Inc. Copper has caught their attention because it’s been a dormant metal, lagging behind other commodities for most of the year, according to the bank’s analyst David Wilson.

While copper gave up some gains for a second day on Wednesday, it’s still the best performer on the LME this quarter, climbing 13 percent, lifted by the surge in interest from China and increasing signs of economic resilience in the country, which consumes more than 40 percent of the world’s supply. While the metal has also been buoyed by Trump’s $1 trillion spending pledge over the next decade, Goldman Sachs Group Inc. says the scope of the stimulus doesn’t justify the move and prices have risen too far too fast.

“We’re going to see huge volatility in the short term,” said Stephen Huang, chief executive officer of Arc Resources Co., a major copper trader based in Hong Kong. A rally that started before the election accelerated as “speculators exaggerated or read too much into the Trump event in terms of planned policies such as infrastructure spending. It’s been largely driven by the inflow of speculative money, both China and overseas,” he said by phone on Monday.

Buying from Chinese investors has helped push up prices of other commodities in the country this year, with iron ore and steel climbing to the highest level in more than two years and coking coal rising to a record for the contract that started trading in 2013. This has happened in the face of attempts by Chinese exchanges to curb speculation including hikes in trading fees.

Baffling Surge

The metal’s roller-coaster ride comes as top executives from global miners, traders and consumers attend a conference in Shanghai on Wednesday. In a reminder that demand growth is slowing in China as the country moves away from an investment-driven economy, the world’s biggest producer Codelco has slashed the premium it’s offering customers for refined metal there by 27 percent in the biggest cut since 2009.

Copper’s surge has baffled many traders and analysts who have spent their careers closely monitoring fundamental indicators such as the level of demand and mine supply. While Goldman Sachs and Citigroup have differed on their forecasts this year, they agree the latest climb has been too rapid. While Goldman raised its price outlook on Tuesday, the bank was still bearish from current levels, seeing a surplus of 400,000 metric tons in 2017. Citigroup has said prices may fall by the year-end as speculative trading cools. The metal traded at $5,488 a ton on Wednesday.

“We only need to look at the intraday price movements to find that most of the recent gains occurred during Asian hours,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, Denmark, said by e-mail. “To me its clear that this is a speculative bubble built on a weak foundation.”

— With assistance by Martin Ritchie, Winnie Zhu, and Agnieszka De Sousa

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