Analysis of Copper Market Dynamics Amid Rising Net Long Positions and Chinese Inventories

Net long positions in copper on the London Metals Exchange (LME) have surged to a six-month peak, partially driven by dwindling Chinese copper inventory figures. However, industry insiders assert that this often-bullish signal does not necessarily align with the actual market conditions.

China, the world's largest consumer of copper, currently maintains a combined inventory of 110,314 metric tonnes across the Shanghai Futures Exchange and Chinese bonded warehouses. This represents a year-on-year decline of 53% and is equivalent to slightly less than three days of consumption.

Despite the recent slump in futures prices on both the London and Shanghai exchanges, some investors have been amassing long positions based on LME data. They anticipate a forthcoming price rebound due to China's critically low inventories and expectations of robust economic stimulus measures by the Chinese government.
LME data reveals that the collective net long position in copper escalated to 9,488 contracts on August 11, marking the highest point since February 10, as indicated in the Commitments of Traders Report.

Goldman Sachs highlighted, "With China's limited inventory coverage on Western exchanges, the copper price could exhibit significant right-tail risk if faced with supply disruptions or favorable announcements in China's policy support." The bank's report from August 11 also indicated a prevailing strategy of buying copper dips rather than anticipating downside risks.

However, traders and manufacturers contest this perspective, asserting that an ample supply of copper is readily available. Given the sluggish demand caused by economic deceleration, a supply squeeze is unlikely in the near term. Furthermore, the indicator's accuracy might be compromised as more copper is exchanged directly between parties outside of the futures exchanges.

Zhang Kaimin, a purchasing manager at Hubei Shidai Refined Copper Technology, emphasized that copper stock data no longer holds paramount importance in assessing market dynamics. The ready availability of spot supply and the ability to source materials at competitive prices are key considerations.

Notably, readily available Chinese copper stocks in the spot market, including those within Shanghai Futures Exchange warehouses, totaled 82,600 tonnes on August 14. This represented a 17.5% increase year-on-year, according to SMM, an information provider.

Despite this, Chinese bonded warehouse inventory recorded 57,399 tonnes on August 11, constituting a 70% decline from the same period last year, according to SMM data. Analysts attribute this drop to factors including elevated U.S. dollar financing costs, the exit of the Maike Group, a significant copper trader, and challenges within the Chinese property sector.

While strong demand from sectors like electric vehicles, solar, and wind provides support, overall economic conditions must improve before a substantial upswing can be expected. Observers are closely monitoring China's ability to stimulate its economy from its current levels as a key factor influencing the copper market's trajectory.

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