New York - Investors are backing away from copper after the biggest two-month rally since 2012.

The problem is that demand is slowing in China, which accounts for about half of global copper use. Producers including Freeport-McMoRan say Chinese buying hasn’t picked up as it normally does at this time of year, and Goldman Sachs Group and Societe Generale SA are among banks predicting lower prices.

The metal is losing its appeal for money managers, who have reduced their net-long positions for two straight weeks, according to Commodity Futures Trading Commission data. Analysts, traders and hedge funds surveyed by Bloomberg last week were split on the price outlook, assessing rising inventories and prospects for reduced China consumption against aging mines that will mean limited supply gains.

“The market isn’t sure about how much production we’re going to see and how much Chinese demand there’s going to be,” Paul Christopher, the St Louis-based head of international strategy at Wells Fargo Investment Institute, which oversees $1.6 trillion. “There’s still lingering concern about excess inventories, especially in the second half of this year.”

The metal climbed 9.8 percent in the two months through March 31, the biggest such gain since August-September 2012, amid speculation that China would increase stimulus measures, while operating glitches at some mines threatened to erode supply.

Copper prices

Copper futures on the Comex in New York lost 17 percent last year and are down 1.8 percent this year. In 2015, the Bloomberg Commodity Index has dropped 2.2 percent, while the MSCI All-Country World Index of equities advanced 4.1 percent. The Bloomberg Dollar Spot Index climbed 4.8 percent.

Speculators cut their net-long positions in copper by 7.3 percent to 14,295 futures and options in the week ended April 14, CFTC data show. Those wagers were trimmed 9.8 percent in the prior week. Total long positions, or bets on higher prices, were reduced by 6.3 percent in the latest report, the most since January 20.

The International Monetary Fund on April 15 highlighted the threat of a “retrenchment” in Chinese industries that are facing overcapacity, as well as in the country’s property market. Financial stress among Chinese real-estate firms could cause “cross-border spillovers,” the fund said. The IMF also said that risks to the global financial system are rising as emerging markets face a squeeze from the strong dollar and weak commodity prices.

Alarm bells

Those worries have some analysts sounding the alarm on copper. In a report April 12, Goldman cast doubt on the durability of the recent rally, saying demand will decline as fewer houses are built by China’s construction industry, which generates about 60 percent of the nation’s annual consumption of the metal. The bank estimated prices in London would fall at least 15 percent by year-end.

Economic data last week from the US added to demand concerns, as industrial production dropped more than economists forecast in March and applications for future home building slid the most in 10 months. The Copper Development Association says construction accounts for about 40 percent of the commodity’s use.

Societe Generale said lower energy prices and weakening producer currencies against the dollar are cutting costs for mining companies, spurring output.

Supply disruptions

While many analysts say supply will exceed demand this year, disruptions at mines including BHP’s Olympic Dam in Australia and Freeport’s Grasberg in Indonesia mean the glut may shrink. Last week, RBC Capital Markets forecast a surplus of 60 000 metric tons in 2015, down from its prior forecast of 139 000 tons.

Supply concerns signal prices are likely to hold recent gains, RBC analysts led by Fraser Phillips said. Macquarie Group Ltd says copper on the London Metal Exchange will approach $6 500 a ton this year, or about 7 percent above Friday’s closing price.

Speculation that China will move to shore up growth is also supporting copper, after gross domestic product grew last quarter at the slowest pace since 2009. The People’s Bank of China cut banks’ reserve requirements by the most since the global financial crisis on Monday.

Premier Li Keqiang has said the government would take more targeted measures to boost the economy, and Chinese equities closed at the highest since March 2008 last week.

Chinese stimulus

“If you’re in the camp that China needs to do more to stimulate the economy, that’s a net positive for copper,” said Quincy Krosby, a market strategist based in Newark, New Jersey, at Prudential Financial, which oversees more than $1 trillion in assets. “All you need for copper is the Chinese authorities to target an infrastructure project, and it would have to be massive.”

Inventories in warehouses tracked by the LME have risen 41 percent in the past 12 months. Stockpiles reported by the Shanghai Futures Exchange have more than doubled this year.

Out of 17 analysts, traders and hedge funds surveyed by Bloomberg at the World Copper Conference in Santiago last week, nine expected copper on the LME to approach or fall below its five-year low and eight said the worst is over.

“There does seem to be a sense of confusion and lack of conviction in copper,” said Michael Gayed, the chief investment strategist at Pension Partners LLC in New York. “Markets go up, and then something slams them. You don’t have that conviction in any trend just yet.”

* With assistance from Agnieszka de Sousa in Santiago