Bearish funds flee turbulent copper and turn to aluminium: Andy Home

Reuters

19-05-2025

LONDON, May 19 (Reuters) - The prospect of U.S. import tariffs on copper has been a bonanza for physical metal traders, but the resulting price turbulence has been a big headache for fund managers.
Ever since U.S. President Donald Trump ordered an investigation into copper imports in February, copper trading has centred on the premium commanded by the CME's U.S. price over the London Metal Exchange's (LME) international price.
It's been a highly volatile trade and the transatlantic rift in pricing has undermined Doctor Copper's customary investment role as a proxy for the state of global manufacturing.
Many fund managers have simply given up. Both investor positioning and market open interest on the CME copper contract have dropped sharply over the last couple of months.
Some, however, have rotated into aluminium as a new forum for expressing a negative view of the current global trade picture.
Fund positioning on the CME copper contract amounted to 134,000 contracts at the start of the year, with money managers fairly evenly split between long and short bets.
Total participation has since shrunk to 82,000 contracts, with investors now net long to the tune of 24,780 contracts, according to the latest Commitments of Traders report.
Trading activity on the CME's copper contract fell 35% on a year-over-year basis in the January-April period, while market open interest touched a one-year low at the end of last month.
That's surprising given that copper has hardly been out of the news since the initiation of the so-called Section 232 investigation into U.S. imports.
But the relentless stream of headlines about both the copper tariff and the broader tariff stand-off with China has turned trading of the metal into a wild ride, particularly on the CME contract.
Plenty of investors have reduced their exposure, whether voluntarily or otherwise.
Funds expecting copper to fall in price due to the impact of trade tariffs on global growth have been particularly hard hit. Money manager short positions have fallen to their lowest levels since November 2022.
But bulls are hardly rampant either. The collective investment long position has been flat-lining since the middle of April.
There's no indication that the money leaving the CME has gone to the London copper market. Fund positioning on LME copper is also low amid a sharp reduction in bullish bets and an ongoing decline in bearish bets.
Rather, it is aluminium which seems to have caught the attention of money managers looking to express a negative view of the macro picture.
Aluminium is insulated from the sort of arbitrage turmoil seen in the copper market because the CME's aluminium contract isn't a U.S. customs-cleared price but rather mirrors the LME's international product.
So even though the Trump administration lifted the tariff on aluminium imports to 25% in its early days of office, the tariff trade has been quarantined to the CME's U.S. Midwest physical premium contract.
That's enticed funds to lift short positions on LME aluminium to the highest levels since last July. Investors have simultaneously slashed bets on higher aluminium prices, meaning that net fund positioning has flipped from super-bullish as recently as March to neutral.
The rotation of fund money from copper to aluminium helps explain the two metals' recent price divergence.
LME three-month copper has largely recovered from its "Liberation Day" tariff meltdown, bouncing back by 17% from the April 7 lows to the current $9,500 per metric ton.
The LME aluminium price, by contrast, has staged a much more modest 6% recovery from the April sell-off. Three-month metal is trading around $2,450, down 4% on the start of the year and the second-weakest performer among the LME base metals next to zinc.
Aluminium may yet prove to be a rocky ride for bears. LME warehouse inventory is steadily declining, time-spreads have contracted over the last month, and the benchmark cash-to-three-months period was flirting with backwardation last week.
Fund managers, however, evidently feel it is still a lot less scary than attempting to ride the copper roller-coaster.
The opinions expressed here are those of the author, a columnist for Reuters.