Sep 27 (LTIT) – You've got to feel sorry for Doctor Copper. He and his base metal friends find themselves on the front line of the escalating trade stand-off between the United States and China.

London copper has clawed its way back from August's 13-month low of $US5,773 per tonne but at a current $US6,280 is still 15 per cent off its June peak of $US7,348.

With the exception of that other front-line commodity, soybeans, the rest of the commodities universe seems to be relatively unaffected.

The oil market is positively bubbling away, while iron ore and steel prices remain surprisingly resilient to the prospect of a full-blown trade war between the world's two biggest economies.

There is, however, logic to the punishment meted out to Doctor Copper.

Trade wars, the reasoning goes, mean lower global growth down the line. That's bad for copper usage. Particularly, if growth in the world's largest user of the metal, China, is hit as well, which seems more than likely.

A stronger dollar and ominous signs of stress in emerging markets such as Argentina and Turkey top up the bearish cocktail.

Doctor Copper, seen this way, is signalling that we should be worried about where global manufacturing is heading.

The curious thing is that right now he seems to be in robust good health.

Copper's current positive internal dynamics are increasingly at odds with a price that remains depressed by global macro gloom.

Short-term fundamentals may yet bite back the many fund shorts.

Falling stocks, rising premiums

Stocks of copper held in the London Metal Exchange (LME)warehouse system have been steadily sliding for some time and at 210,900 tonnes are back at January levels.

Excluding metal earmarked for physical load-out, there are just 119,725 tonnes of warranted material, the lowest amount since September last year.

Not entirely surprisingly, LME time-spreads have been tightening. The cash-to-three-months spread flipped into backwardation last week and was valued at a small contango of $US3.25 at Tuesday's close. A month ago it was valued at $US42 contango.

True, LME copper stocks have been an unreliable indicator in the recent past but inventory registered with both the CME in the United States and with the Shanghai Futures Exchange (ShFE) has been falling as well.

Between them, the three exchanges hold just under 481,500 tonnes of copper, the lowest total since November 2016.

Physical premiums for refined copper have been rising. That for Yangshan, the bonded warehouse zone in Shanghai, is assessed at $US120 per tonne by Shanghai Metal Market. It's jumped from $US84 since the start of the month to its highest level since 2015.

The combination of falling stocks and rising physical premiums would suggest a supply chain that is struggling to keep up with demand.

Soaking up surplus

Such evidence of tightness is surprising given the conspicuous lack of disruption to mine supply.

Copper bulls had high expectations that at least one of the multiple labour contracts up for renewal this year would result in strike action.

However, all the potential labour flash-points have so far passed peacefully and mine production grew at a healthy 5 per cent clip in the first half of this year, according to the International Copper Study Group.

It seems, though, that surplus mine supply has simply been soaked up by Chinese smelters.

China imported 1.85 million tonnes of mined copper concentrates in August, a record monthly high. Cumulative imports boomed by 18 per cent in the first eight months of the year.

This accelerated flow of raw material hasn't translated into reduced import appetite for refined copper.

Imports of unwrought copper rose by 15 per cent over the same time-frame.

China's customs department hasn't published a breakdown of its monthly trade figures since March, but assuming no significant change in other import categories such as copper alloy, imports of refined metal likely grew at a similar pace.

Some of this import strength may be down to reduced availability of copper scrap.

Copper scrap imports have slumped by 43 per cent so far this year thanks to China's tightening of the purity rules on the type of material it will take.

The headline drop in bulk tonnage may mask an increase in the copper content of the scrap, but further disruption will come in the form of China's tariffs on scrap from the United States, the biggest supplier of high-grade material to the Chinese market.

But even allowing for the scrap disruption effect, China's appetite for imported copper in other forms has been unexpectedly strong.

If there's a China-led global slowdown in copper usage coming, it seems no-one has told the country's copper sector.

A question of time?

None of which necessarily negates funds' negative view of the copper price.

Disconnects between fundamentals and fund money are not unusual in commodity markets and may be down to a simple question of time-frame.

Speculators may be taking a longer-term view of copper's prospects than the next few months.

It is also possible, however, that Doctor Copper will not perform according to the gloomy script at all.

China has shown every indication of doing what it always does when it's worried about slowing economic momentum, namely investing in more infrastructure.

The country's most powerful planning body, the National Development and Reform Commission, said on Sept. 19 that it intended to boost investment in targeted sectors such as metropolitan subway systems.

It will be a delicate balancing act since Beijing is still deleveraging from previous spending sprees.

But it's worth remembering that even before the first US tariffs on Chinese goods kicked in on July 6, the copper market was already fretting about China's slowing fixed asset investment.

It's about to get a government boost, ironically thanks to the trade dispute with the United States which caused funds to sell copper in the first place.

Whether it will be enough to offset what shows every sign of becoming a full trade war remains to be seen.

Funds holding short positions on the copper market may not have the luxury of waiting that long.

LME time-spreads have a nasty habit of realigning future expectations with cash-date reality.