Copper's early-year rally leaves investors unimpressed: Andy Home

By Andy Home

LONDON (Reuters) -Doctor Copper has started 2025 with a spring in his step after a year when the early bull party was followed by a prolonged hangover.

The London Metal Exchange three-month price has risen every day in January and is now up 4.0% from the start of the month, making copper the early outperformer of the LME base metals pack.

Market optics have turned more bullish. Exchange copper stocks fell from 600,000 metric tons at the end of August to 430,000 tons at the close of December led by a steep decline in Shanghai Futures Exchange (ShFE) inventory.

Dwindling stocks and China's rising import appetite have rekindled optimism that the country is finally turning an economic corner.

Fund managers are unconvinced, with investors' long positions only marginally ahead of bearish bets on both the CME and LME copper contracts.

The caution is down to the troubling prospect of tariffs and an escalating trade war after U.S. President-elect Donald Trump takes office next week. CME's widening premium to London suggests the copper market is taking the prospect seriously.

UNDECIDED, UNCOMMITTED

Fund managers ended last year holding a small net short on the CME copper contract. The balance shifted to the long side in the first week of 2025 as copper's price strength shook out some of the bears.

However, the net long is a marginal one at just 6,138 contracts with bears and bulls locked in an uneasy stand-off. Outright long positions have held relatively steady since the start of December but are half the levels seen last May, when funds were rushing to join copper's record-breaking rally.

Perhaps equally telling is the steady decline in both volumes and open interest on the CME since May, which suggests many investors have left copper in search of hotter returns.

Indeed, copper trading volumes fell on all three global exchanges in December as fund money disengaged.

Whether it will return will depend on the interplay of copper's positive micro dynamics and an ominous macro outlook.

REASONS TO BE CHEERFUL

After waiting for most of last year for an economic rebound in China, the world's largest copper buyer, the market is now seeing signs of life.

Stubbornly high Shanghai stocks and a rare burst of Chinese refined metal exports deflated copper's bull bubble last year, but inventory and trade trends have turned.

ShFE inventory peaked at 337,000 tons in June last year but sank steadily to just 74,000 tons at the close of December.

China's imports of refined copper increased from a 2024 low of 276,000 tons in August to 398,000 tons in November and accelerated further to a 13-month high in December.

The Yangshan copper premium, a closely-watched gauge of China's import demand, is currently at a one-year high of $75 per ton, indicating China is still hungry for metal.

Given China's own production has been expanding, the inference is that the country is experiencing a sharp pick-up in demand.

REASONS TO BE GLOOMY

The problem is that this sudden growth spurt in China may be all about exporters ramping up production and shipments ahead of any U.S. tariffs.

While nobody is quite sure how Trump 2.0 will play out, it's certain that Chinese goods will be in the new administration's tariff sights.

That could chill Chinese export demand and, indeed, global demand if the U.S. also takes aim at the European Union.

China's giant manufacturing sector is still stuck in neutral while European factory activity has been contracting since the middle of 2022.

Tariffs, particularly on metals-intensive sectors such as the automotive industry, are likely to depress global manufacturing yet further.

Meanwhile, Trump's promise to roll back some of his predecessor's environmental policies has dampened some of the bullish exuberance around copper's green energy narrative.

Strong demand from green sectors such as electric vehicles and solar panels has helped offset weak traditional demand drivers such as the property sector over the last year.

The prospect of a combined tariff war and U.S. slowdown in new-energy deployment is not a happy one for Doctor Copper.

MIND THE TRUMP GAP

The copper market has already reacted to the prospect of tariffs in the form of a widening gap between CME and LME markets.

The CME premium to its London peer has ballooned from near zero at the start of 2025 to more than $400 per ton. That makes sense given the CME is a duty-paid customs-cleared contract, making it highly sensitive to any change in import duties.

The premium has yet to hit the extreme levels seen last May, when CME shorts got caught in a ferocious squeeze due to extremely low exchange stocks.

CME inventory has since increased from under 7,000 tons in June to almost 85,000 tons even as LME and ShFE stocks have been falling.

More metal is likely lurking off the market, given U.S. copper imports surged to 345,000 tons in the third quarter of 2024 from 166,000 tons in the prior quarter.

The widening arbitrage is an incentive for yet more metal to be shipped to the U.S. before the tariff gate comes down.

If it falls on copper, the U.S. premium is likely to become a new volatile component of the global market.

If Trump makes good on his threat to tariff everyone, the resulting disruption to global trade is likely to become the defining feature of the copper price this year.

Funds are evidently in wait and see mode.

The opinions expressed here are those of the author, a columnist for Reuters.

(Editing by Paul Simao)