The latest data shows more funds with bearish positions than bullish copper positions on the London Metal Exchange and COMEX.
Benchmark LME copper at around $8,160 a tonne is up 18% since hitting a 20-month low on July 15.
But it has fallen 25% since touching a record $10,845 a tonne in March because of a growth slowdown in top consumer China and aggressive interest rate hikes that threaten a global recession.
Graphic: Copper Rebounds from Sharp Fall from Record Peak https://fingfx.thomsonreuters.com/gfx/mkt/egvbkdaddpq/Copper%20Rebounds%20after%20Sharp%20Fall%20from%20Record%20Peak.png
"Funds have been building up short positions in anticipation of recession," said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
Data from broker Marex shows the net speculative short position in LME copper is lower, but still stands at 24% of open interest or 1.4 million tonnes as of Aug. 4.
Data from the COMEX showed money managers were net short 17,715 copper contracts or 200,888 tonnes on Aug. 2, down 2,042 contracts from a week earlier.
Graphic: Speculators Betting on Lower U.S. Copper Prices https://fingfx.thomsonreuters.com/gfx/mkt/myvmnegxypr/Speculators%20Betting%20on%20Lower%20U.S.%20Copper%20Prices.png
Some investors have been buying put options, giving the holder the right to sell copper at a specific price at a fixed date in the future.
An options trader, who asked not to be named, said many speculators had been using LME options to target the downside.
Open interest in December LME put options lie at strike prices of $7,000, $6,000 and $5,000, LME data as of Wednesday showed.
Graphic: Speculators Buy LME Options to Target Copper Downside
Some of those levels correspond to marginal production costs that investors often use to gauge how far metals prices could fall in a bearish scenario.
The direct costs of smelting copper at the 10% of highest cost producers are $5,085 a tonne, rising to $6,000-$6,400 per tonne when sustaining capital expenditure - needed to maintain current output - is included, Morgan Stanley said in note.
Graphic: Marginal Cost of Production for Copper Pegged at $5,085/T
If the price remained below marginal cost for a prolonged period, losses could force some producers to shut down.
"Sometimes the spot price will just plunge right through that (marginal) level," Tom Price, head of commodities strategy at Liberum, said, adding that the disconnect between costs and prices could last for weeks or months.
Price estimates marginal costs for copper at around $6,100 a tonne.
(Reporting by Eric Onstad; editing by Pratima Desai and Barbara Lewis)
By Eric Onstad