LONDON, July 18 (Reuters) - Copper's electrical conductivity makes it a core component of the green energy transition, whether it be in the form of solar panels, electric vehicles or wind turbines.
As far as analysts at Citi are concerned, all this makes copper "THE bullish energy transition trade within commodities." ("Commodities Strategy", July 17, 2023)
Except no-one appears to have told the fund community, which continues to give Doctor Copper a wide berth.
Copper's bull narrative of looming supply shortfall as investment in new mine capacity fails to match the green demand booster has been put on hold.
Rather, funds are taking their short-term cue from global manufacturing weakness, first and foremost in China, the market's traditional demand driver.
Despite the conspicuous absence of investor participation, London Metal Exchange (LME) three-month metal is still trading at a relatively elevated $8,430 per metric ton.
Which begs the question of where it might be if funds were collectively to buy into the green copper story.
Money manager net positioning on the CME copper contract has been flipping between long and short in recent weeks as LME copper chops around in a $8,140-8,870 range.
The most recent Commitments of Traders Report shows funds holding a marginal net long of 3,787 contracts as of the July 11 close.
Outright long positions have been reduced to 47,815 contracts from an early-year high of 78,429 when the market was still betting on a turbo-charged rebound in China after last year's stringent COVID-19 restrictions.
China's recovery has disappointed copper bulls and funds shifted to the short side in May, coinciding with LME copper hitting the lower end of its trading range. Those positions too have since been reduced, leaving positioning close to flat.
Fund positioning on copper is running at muted levels relative to previous years.
The January peak in bullish bets was much lower than the previous high of 118,463 contracts in February 2021, when the copper price was surging higher from its COVID-19 lows a year earlier.
The lack of collective buy-in looks even starker relative to August 2017, when investors lifted bullish bets to a record 151,400 contracts as they chased the uptrend from the cycle lows of 2016.
It has been a similar story on the short side. This year's May peak of 67,561 contracts was a far cry from the 113,600-contract bear bet accumulated in August 2019, when copper was falling steadily towards the $6,000-per metric ton level.
Funds' lack of enthusiasm for copper has also been reflected in subdued trading activity across all three major venues.
Open interest on the CME contract trended steadily lower from August 2017 to the close of last year. Trading volumes on the U.S. exchange, the LME and the Shanghai Futures Exchange all sank in tandem over the first eight months of 2022.
Both volumes and open interest have perked up this year, but the driver appears to have been the China reopening story rather than the longer-term green energy narrative.
OUT OF FAVOUR
The overall impression is of money managers staying on the sidelines of the copper market, reluctant to short the market too heavily due to low stocks but equally loathe to commit to copper's upside.
In part this is down to a broader fund exit from the commodities sector with retail and institutional assets under management declining by 11% in the first half of the year, according to Citi.
Returns from both the energy and metals sectors have been negative, weighing on commodity basket investments and encouraging funds to seek out better rewards in global equity markets.
Passive commodity indices remain a key entry point for many bigger fund players with trickle-down impact on all the individual component markets such as copper.
This year's outflow of money from the broader sector is one reason why investor positioning in copper is so light.
But Doctor Copper's historic relationship with global manufacturing activity, currently weak just about everywhere, also seems to have discouraged any market-specific investment flows.
WAITING FOR THE GREEN LIGHT
Yet, as Citi points out, copper could be one of the most attractive green energy plays, combining the energy transition story, the metal's relative high score on environment, social and governance metrics and the fact that it is a highly liquid global market.
Were the investment community to buy into that proposition, it could have dramatic price consequences in a physically constrained marketplace.
Citi sees speculative positioning rising to 4 million tonnes in 2025, double the historical peak, with prices "easily" reaching $12,000-15,000 per metric ton.
The bank concedes, however, that it will probably take a turn in the old industrial cycle to regain investors' interest in Doctor Copper.
Until then, no-one seems keen to drive through the green go light.
The opinions expressed here are those of the author, a columnist for Reuters.
(Editing by Conor Humphries)