Speculators in the copper market, seen as an indicator of the health of the economy, are betting that the global slowdown means the metal used in energy and construction will have to continue falling despite its recent rebound.
The latest data shows that there are more bearish than bullish funds on the London Metal Exchange (LME) and COMEX.
Benchmark LME copper, at about $8,160 a tonne, has risen 18% since hitting a 20-month low on July 15.
However, it has declined 25% since hitting a record high of $10,845 a tonne in March, due to slowing growth in top consumer China and a series of aggressive interest rate hikes that threaten a global recession. .
“Funds have been building up short positions in anticipation of a recession,” said Ole Hansen, head of commodity strategy at Saxo Bank in Copenhagen.
Data from brokerage Marex shows the net speculative short position in LME copper is smaller but still 24% of open interest or 1.4m tonnes as of August 4.
COMEX data shows money managers were net short 17,715 copper contracts or 200,888 tonnes on August 2, down 2,042 contracts from a week earlier.
Some investors have been buying put options, which give the holder the right to sell copper at a specified price on 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.
Some of those levels correspond to the marginal costs of production that investors typically use to gauge how far metal prices could fall in a downside scenario.
Cash costs for copper smelting at the top 10% of cost producers are $5,085 per tonne, rising to $6,000-6,400 when sustaining capital expenditures—necessary to maintain current production—are included. Morgan Stanley said in a note.
If the price remains below marginal cost for an extended period, the losses could force some producers to close.