Copper bears turn into bulls before prices rally most since 2011

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Copper investors turned bullish for the first time in four months on optimism that a stabilising global economy will help demand recover.

Money managers shifted just in time to reap the rewards of the biggest weekly advance since 2011. Copper stockpiles are shrinking, signaling tighter supplies at a time when a robust U.S. labor market is helping to support the consumption outlook. The upbeat sentiment is defying a bearish view expressed last week by the chairman of Codelco, the world’s biggest producer.

As recently as January, copper futures were trading at the lowest since 2009 as growth weakened in China, the world’s biggest user. Since then, prices have rebounded 18 percent on optimism that mine owners have announced enough cutbacks to help erode a global production surplus. Chinese leaders have taken measures to help shore up their economic expansion, and the government will increase its deficit as it shells out more funds to underpin growth.

‘Less Negative’

“It’s encouraging to see that the U.S. data’s gotten less negative, and that may eventually feed into the international side,” Sameer Samana, a St. Louis-based global quantitative strategist at Wells Fargo Investment Institute, which oversees $1.7 trillion, said in a telephone interview. “What’s driving some of the more positive sentiment around equities and around commodities is that economic data is getting less negative compared with what expectations are.”

The net-long position in copper futures and options was 5,957 contracts on March 1, according to U.S. Commodity Futures Trading Commission data released three days later. That compares with a net-short holding of 2,095 a week earlier and 33,999 on Jan. 19. Last week, copper futures rose 7 percent to $2.2745 a pound on the Comex in New York, the biggest gain since December 2011. Prices posted six straight daily gains through March 4, the longest stretch since May 2015.

U.S. companies added more workers than projected in February, indicating the job market remains strong as the labor force grows at the fastest pace in more than a decade, government data showed last week. Stockpiles in warehouses tracked by the London Metal Exchange, the global benchmark, fell 21 percent this year to 186,700 metric tons. That’s the lowest since January 2015.

China’s government will permit a record high deficit and has raised its money supply expansion target. Premier Li Keqiang announced a 6.5 percent to 7 percent expansion goal Saturday, down from an objective of about 7 percent last year. The plan reflected the country’s determination to maintain growth and put off confronting its debt.

Copper for immediate delivery in London is more expensive than the benchmark contract for delivery in three months. That market structure, known as backwardation, usually signals limited supplies. The spread last week reached the widest since late November.

Prices in New York have climbed for three straight weeks. Mine operators including Glencore Plc and Freeport-McMoRan Inc. have reduced production, helping to curb the outlook for a supply overhang. The cuts also helped revive mining shares. A Bloomberg Intelligence measure of 33 copper producers jumped 32 percent in 2016, including a 22 percent rally last week that was the biggest since 2008. Glencore’s top executives said March 1 that they see commodity prices bottoming even after the company reported its worst profit since going public five years ago.

Bearish View

Glencore’s view contrasts with that of Oscar Landerretche, the chairman of Codelco, Chile’s state-owned producer. Last week, he  said that a global surplus will persist through this year and next, and dismissed suggestions that a recent gain in prices was likely to endure. While the metal has gained in six of the past seven weeks, it is down 51 percent from a record in 2011 as output rose faster than demand. Goldman Sachs Group Inc., in a report last month, projected an excess of 670,000 tons in 2016, up from 340,000 a year earlier, and said the bear market in copper will last through 2018.

Recent inflation data showing core-price pressure and stabilizing oil costs will allow the Federal Reserve to lift U.S. interest rates at last twice more later this year, but not before June, said Rob Haworth, a Seattle-based senior investment strategist at U.S. Bank Wealth Management, which oversees $125 billion of assets. Higher rates usually spark gains for the dollar and reduce demand for commodities as alternative assets.

“The market is not too worried about surpluses, but we are very worried about the Chinese macro story,” said Harish Sundaresh, a portfolio manager and commodities analyst in Boston for the Loomis Sayles Alpha Strategies team, which oversees $5 billion. “I am actually fairly bullish copper with a two-to-three year outlook. But in the near term, there will be a very wide range trade, just driven by Chinese sentiment.’’