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RPT-COLUMN-Copper bulls load up on longs, but China PMIs are unconvincing: Russell

Russell@ (Repeats item issued earlier. The opinions expressed here are those of the author, a columnist for Reuters.)

* Graphic of China PMI vs. LME copper: http://tmsnrt.rs/2sDi5Gi

LAUNCESTON, Australia, July 3 (Reuters) - Copper reached a three-month high after a surprise rise in China's Purchasing Managers' Index (PMI), and while the boost was short-lived it does beg the question as to whether better times are ahead for the industrial metal.

Benchmark London copper futures touched $5,965 a tonne on June 30 after the official Chinese PMI rose to 51.7 in June, it's eleventh consecutive month on the positive side of the 50-level that marks expansion from contraction in the world's biggest manufacturing sector.

Copper's gains didn't last beyond the Asian session, slipping as the U.S. dollar strengthened and also as London Metal Exchange data showed inventories of the red metal gained, indicating supplies are plentiful.

Nonetheless, copper is holding around its strongest levels since March, and is up 8.2 percent since its recent closing low of $5,486 a tonne on May 8.

Hedge funds and other money managers also seem to be backing the view that copper's recent rally still has further to run, boosting long positions by 9,531 contracts to 58,816, according to U.S. Commodity Futures Trading Commission data, released on June 30.

The net-long copper position is now nearly double the 29,787 contracts reported on May 9, and a dramatic reversal from the net-short position of 47,109 contracts that prevailed a year ago, on June 14, 2016.

It's probably no surprise that hedge fund managers have switched from net-short to net-long copper as the Chinese manufacturing sector has improved over the past year.

But is this optimism still justified or is copper starting to look a little stretched?

In past periods of gains in China's PMI, copper has certainly also rallied, and on one occasion since the 2008 global recession, it continued to rise even after the PMI peaked.

The PMI was at 51.2 in June 2010 and rose to 55.2 by November of that year, while London copper rose from around $6,101 a tonne in June to a peak of $10,160 in February 2011.

The PMI troughed at 49 in November 2011, before rising to 53.3 by April 2012, while copper bottomed slightly before the PMI, reaching $6,735 a tonne in October 2011, before hitting a top before the PMI, at around $8,760 in February 2012.

Since then the PMI trended lower along with copper until the index hit a low of 49 in February 2016, slightly after the bottom for copper in January 2016.

While the Chinese PMI is far from the only driver of copper prices, it appears to be a useful indicator.

CHINA CHALLENGES AHEAD

The problem for copper bulls is that it's becoming harder to find analysts that think the PMI is going to extend its recent strong run. Most are bracing for weaker readings in the second half of 2017.

This is largely because of the view that keeping China's stimulus spending going is becoming more of a challenge for the authorities in Beijing, especially given concerns over credit quality and a slowdown in the key residential property construction sector.

There also appears to be a widening gap between large, mainly state-owned firms and small- to medium-sized private companies.

The official PMI captures more of the large corporate sector, which appears to be more resilient to tightening credit conditions than the smaller businesses.

The Caixin PMI, which measures more smaller businesses, did rise in June to 50.4, surprising market watchers, who had picked a reading of 49.5 in a Reuters survey of 25 analysts.

However, it's worth noting that the Caixin PMI is only just in positive territory and well below the official measure.

Another point from the Caixin PMI was confidence among Chinese manufacturers for the next 12 months fell to lowest level this year in June, underscoring the mood of caution that currently prevails.

While the PMIs may on the surface be producing positive signs for copper, the detail shows the outlook is not as bullish as the rise in net-long positions may suggest.

China's copper imports are also not looking that great for prices as well, with refined metal imports down 28.2 percent in the first five months of the year.

Chinese buyers appear to be switching to scrap copper, with imports rising 17.6 percent in the first five months, a shift that is hardly going to boost the price of London futures.

It's worth noting that scrap imports in the January to May period were 1.51 million tonnes, while refined imports were 1.27 million tonnes, a reversal from 2016, when refined metal imports were 3.7 percent higher than those of scrap.

Putting the import data together with the two Chinese PMIs and the case for being cautious about the copper price outlook for the next few months seems to be more convincing than placing a bullish bet.

(Editing by Richard Pullin)