LONDON, Aug 19 (Reuters) - Investors fleeing the copper

market are likely to be sidelined for many months, leaving the

field clear for physical players who expect demand in top

consumer China and elsewhere to deteriorate over coming months

and weigh on prices.

A fund buying frenzy, based on an expected shortage of

copper relative to demand, sparked a rally on the London Metal

Exchange (LME) earlier this year, which quickened as momentum

traders entered the fray to lift prices to a record high above

$11,100 a metric ton in May.

At the same time, commodity traders were buying on the LME

to deliver against their commitments to sell copper on

COMEX, part of CME Group ( CME ).

However, copper has dropped nearly 20% since as persistently

weak manufacturing activity led the physical market to reassert

control, with consumers putting purchases on hold and producers

and traders delivering surplus metal to LME-registered

warehouses.

"Updates to demand and refined production have pushed the

market to a surplus sooner than expected," said Macquarie

analyst Alice Fox, who expects copper surpluses of 265,000

metric tons this year, 305,000 tons in 2025 and 436,000 in 2026.

Fox said prices may recover in the fourth quarter if

exchange stocks are drawn down.

"However, absent faster global growth boosting demand, the

more sizeable surpluses in 2025 and 2026 mean this rally is

likely to be short-lived," Fox said, adding that prices could

fall back towards $8,000.

BURNT FINGERS

LME copper hit 4-1/2 month lows of $8,714 a ton in

early August as U.S. recession fears and concern the Federal

Reserve has kept interest rates too high exacerbated negative

sentiment from soaring inventories and lacklustre demand.

China consumes more than half of global refined copper

supplies, estimated at around 26 million tons this year.

But much of the copper used in China is for wiring in

household goods which are then exported. A housing market slump

and China's stagnant manufacturing sector highlight the

headwinds copper demand faces.

"If you strip out exports, domestic demand in China looks to

be anaemic. There's no copper shortage," said BNP Paribas

analyst David Wilson, who expects a surplus of between 150,000

and 200,000 tons this year.

"Product fabricators have destocked. If you are a

manufacturer and unsure about the outlook for demand and

exports, you are not going to restock aggressively."

Data from the International Copper Study Group (ICSG) showed

a copper market surplus of 416,000 tons between January and May,

laying bare the idea of large deficits this year.

Copper inventories in warehouses registered with the LME, a

market of last resort, have risen to five-year highs above

300,000 tons, up around 200% since mid-May.

Most of the metal was delivered to LME warehouses in Korea

and Taiwan. It came from Chinese producers unable to sell their

wares to the domestic market and aiming to take advantage of LME

prices above those on the Shanghai Futures Exchange.

Copper stocks in the South Korean cities of Busan and

Gwangyang and Taiwan's Kaohsiung totalling 239,100 tons now

comprise 78% of total copper stocks in the LME system compared

with 31,925 tons and 31% on May 16.

The threat of a prolonged strike at BHP's Escondida

copper mine in Chile, which produced nearly 5% of the world's

copper in 2023, raised concerns last week about tighter supplies

but a settlement on Sunday dispelled the fears.

Over the longer term however, deficits are predicted as

structural changes to copper consumption from new technologies

linked to AI and the energy transition accelerate.

"We still see copper as the backbone for decarbonisation,"

said Glencore ( GLCNF ) CEO Gary Nagle at a recent briefing.

"Spending on AI data centres, renewable infrastructure is very

copper hungry, very copper intensive."