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It is noted that market positioning data showed that the funds are back in the metals markets in a big way. LME net long positions are at elevated levels, even with the recent bout of liquidation.
The micro indicators in the Chinese physical copper market that supported the bullish view underpinning our previous long copper trade recommendation turned more negative in early July. Withdrawals from the bonded zone warehouses in China have stalled, the premium for imported copper has dropped and while physical prices have continued to trade at a premium to the listed SHFE prices, this premium has compressed.
Demand is also expected to seasonally slow in 3Q. In addition, heavy rains in the center and south of China have caused serious flooding, affecting downstream manufacturing activities in those regions. With the exception of Grasberg, recent copper supply related issues have been largely resolved and we see limited scope for further major labor-related supply disruptions this year.
As per the J.P. Morgan’s projections, the copper mine production is expected to grow by 2.8% yoy in the second half of the year, up from -0.1% in 1H.
Finally, from a macro perspective, Chinese growth to slow to a 6.4% pace in the second half of the year, down from 6.8% likely averaged in 1H. Combined, we think the turn in micro signals as well as our macro outlook warrants going short copper.
