If you want to know how the global economy is faring, many people often turn to the copper price for clues.
As a major industrial metal, it’s seen in some circles as a barometer of economic health. A higher price suggests industrial activity is improving, while a lower price indicates the opposite.
There’s a reason why it’s often referred to as “Doctor Copper”.
If the doctor is telling us something right now, it’s that not all is well with the global economy, especially the largest consumer, China.
The price has been hosed over the past month, falling to a one-year low on Wednesday on many major exchanges around the world. Like the selloff in other cyclical assets, trade war fears have been seen as a catalyst.
“The trigger of the whole slide from mid-June was of course the escalating trade conflict between the United States and various other trading areas, which has led to fears of a GDP slowdown,” says analysts at Macquarie Bank.
However, while the announcement the US may introduce additional tariffs of 10% on $US200 billion worth of Chinese imports undoubtedly contributed to the abrupt selloff, even before it arrived, copper was already under pressure, falling 8.8% on the Shanghai Futures Exchange from the recent high of 54,580 yuan a tonne struck in mid-June.
Was that too due to trade war fears? Or was it due to a deterioration in sentiment towards the outlook for Chinese property construction? Or was it broader concerns about what’s happening in the global economy?
While that’s somewhat of a rhetorical question, thanks to some detective work from Macquarie, perhaps there was another factor that contributed to the scale of the recent selloff.
A mysterious investor who had built up a substantial long position in copper futures last year has suddenly begun to unwind their position.
As Macquarie explains, this was an investor in the “whale” category in terms of copper exposure:
Roughly a year ago the mysterious Chinese brokerage Gelin Dahua, a.k.a. Green Dahua, launched into the Shanghai Futures Exchange (SHFE) copper market by opening a visible long position with a notional value of around $US3 billion. The only confirmed fact about Gelin is that it is owned by Shanxi Securities Company, which is somewhat supportive of the persistent chatter that the true owner is an individual coal miner who, tired of this legislatively disrupted industry, decided to take a huge bullish bet on copper.
However, that all changed late last week:
In subsequent months the visible long position sold down to oscillate in the $US1-2 billion range, and it was at the high end of this last week when it was dramatically cut by around two-thirds to around $US600 million. The selling certainly contributed to the latter stages of copper’s meltdown last week, and was likely triggered by SHFE copper moving below key levels.
The whale was selling aggressively, in other words. Unwinding what was a massive long position compared to the size of the overall market.
“Gelin Dahua’s long position on July 3 was in all visible months after October larger than the other top 19 longs combined,” Macquarie says, adding “the notional value was around 12.2 billion yuan, or $US1.84bn.” Macquarie Bank
“A trimming of length began on July 4, but July 5 saw the big move, whereby all the remaining length in 2018 was sold down. Prices crashed through 50,000 a tonne that day too, suggesting a stop level was triggered.”
So stop-loss selling may explain why copper prices were hammered, a move likely exacerbated by news of this unwind as well as an escalating in trade tensions between the United States and China. Macquarie Bank After selling down its long copper positions in near-dated contracts, Macquarie says Gelin Dahua now holds a long position of around $US600 million on its books, predominantly in the May 2019 contract.
To Macquarie, the scaling back of this mystery bullish bet is a “constructive development for copper”.
“The position was so large that its unilateral moves were frequently enough to drive the price sharply in either direction, but given it seemed to react to stop levels and arcane scrap news rather than observable fundamentals, it was difficult for other speculators to feel comfortable taking a view in this market,” it says.
“Bullishness in particular seemed risky, as who could know whether this entity would decide one day to close out length just as rapidly as it had arrived?
“Well now that has happened, and we can’t help but notice that price-wise we are pretty much back to where it all began in July last year.”
So while Doctor Copper may be trying to tell us about the health of the global economy, perhaps much of the move on this occasion reflects the views on the outlook from one major counter-party.
With it now a far smaller part of the market, perhaps we’ll get a better picture on the health of the economy in the not too distant future.