Doctor Copper is ending the year on a high note. London Metal Exchange (LME) copper has this morning hit a seven-month high of $6,235.50 per tonne, having broken out of its previous $5,500-6,000 range earlier this month.
Funds have been covering back short positions and building new long positions as bank analysts turn more positive on copper's prospects for next year.
The trigger for Doctor Copper's resurgence was the announcement of a "Phase One" trade deal between the United States and China.
The deal is still somewhat nebulous and no-one seems sure whether there will be a "Phase Two", but, to quote Goldman Sachs, there is a sense that "US-China tariffs have peaked". ("Macro at a Glance", Dec. 18, 2019).
That in turn, it is hoped, will help reinvigorate stuttering demand from China's manufacturing sector.
All the LME base metals complex should benefit from the weakening of the trade and demand headwinds but, according to JP Morgan, "copper continues to provide the cleanest story for those who are upbeat about global growth in 2020".
Funds have been holding a large collective short position on the CME copper contract for much of this year, using Doctor Copper as a proxy for trade war negativity.
That big short has been pared back significantly over the course of December. As of last week the net fund short had shrunk to 13,314 contracts, the smallest it's been since May.
Outright short positions have fallen to 73,382 contracts from an August peak of 118,448, while long positioning has jumped to 60,068 contracts from 41,488 at the start of December.
Given the subsequent extension of copper's rally, it's probable that the net short has contracted further.
The same pattern of fund turnaround has been playing out on both the LME and the Shanghai Futures Exchange (ShFE), according to analysts at Citi.
"Copper open interest has increased notably across each of the three main exchanges (LME/Comex/ShFE) and is in aggregate up by around 1.3 million tonnes over the past month - a pace not seen since the 2016 US presidential election," according to Citi.
If this process continues and funds start building a structural long position in copper, notes JP Morgan, it could be "worth about 30% appreciation in the copper price from trough to peak", or a hypothetical high of $7,280.
The dissipation of trade tensions, however fleeting, is coinciding with signs that China's manufacturing sector is accelerating after a prolonged spell of weakness.
China's official purchasing managers index (PMI) rose through the 50 expansion-contraction threshold in November for the first time in seven months.
The Caixin PMI, which tracks China's small and medium-sized companies, rose to 51.8 from 51.7 in October, marking the fastest rate of expansion since December 2016.
The prospect of "peak tariffs" has certainly played a part but improving activity is also a sign that China's latest stimulus measures are starting to gain traction in the country's vast manufacturing sector.
One key area to watch is construction. New starts have been booming, which is one of the reasons Chinese steel demand has remained elevated this year.
Property completions, which tend to be more positive for metals such as copper, have been noticeably lagging but this is starting to change, according to Goldman Sachs.
The bank argues that delayed completion data are down to the fact that new builds in China are increasingly partly furnished rather than "skeletons", translating into at least six months extra time to complete.
Completion data turned positive in August and "our real estate team thinks property completions could increase rapidly by 20% in 2020 due to very robust new start growth in the past three years," Goldman says.
The title of that Goldman research note is another reason why copper is being favoured as a proxy for improving global manufacturing activity.
Unlike other metals such as zinc, which is transitioning from supply shortfall to surplus, copper's supply side looks stressed.
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