InvestIdeas

While investors have piled into copper futures, the market in leading consumer China has been flashing signs of weakness.

Disappointing mine supply “has led to a significant concentrates shortage, resulting in smelters having to cut production and pointing to tighter inventories of refined metal even if demand is lacklustre.

Copper prices have risen by around 15% year-to-date, driven by speculative bets on impending shortages.

This speculation is fueled by copper’s critical role in electrification, particularly in grid-scale energy and data center infrastructure, and the challenges associated with launching new projects for fresh ore supply.

Higher global inventories and evidence of lower near-term demand, particularly highlighted by an unexpected contraction in China's manufacturing sector, led to a downturn in copper prices.

China accounts for more than half of global demand.

Everything in China pointed to a market that should be slumping, and yet prices were soaring on a wave of speculative money.

On one side are bullish fund managers in London and New York, who have plowed 10s of billions of dollars into copper with an eye to future shortages.

On the other are Chinese purchasers, more focused on the here and now, who have rarely if ever been so gloomy.

Prices have dropped about 13% from the peak above US$11,100 a tonne, as speculators sharply reduced their bullish bets in the wake of the surge – with much of that reduction driven by trend-following funds.

Business is shrinking significantly. The physical sales business is very bleak.

Copper in Shanghai’s tax-free bonded zone has been selling at a highly-unusual discount to London Metal Exchange prices for more than a month.

That was painful for many Chinese merchants, who consider the second quarter the peak season for fabricators to purchase and prepare raw material stocks after the annual political meetings of the country.

Instead, copper inventories on the Shanghai Futures Exchange have risen by 78% since the end of Chinese New Year to a record high for this time of the year.