China Metal Probe Weighs on Copper Outlook

China Metal Probe Weighs on Copper Outlook


June 21, 2014 5:10 a.m. ET

BEIJING—Hedge funds and other money managers are building up short positions in the global copper market, according to U.S. data, riding on allegations of fraudulent metal-backed financing in China to amplify pressure on prices of one of the world’s most heavily traded metals.

These positions are likely to further weigh on the outlook for the red metal, as the effects of an official probe on metal stockpiles in the eastern Chinese port of Qingdao continue to ripple across global markets. The port’s operator has confirmed that Chinese authorities are investigating allegations of fraud relating to stockpiles of metals, though the government hasn’t commented publicly.

“Short” positions refer to contracts in which a commodity is borrowed and then sold with the expectation that its price will fall before the borrowed asset has to be purchased and replaced. A high level of short interest among money managers indicates increased market sentiment that an asset price is ready to fall. A “long” position indicates the expectation that the asset will rise in value.

Data from the U.S. Commodity Futures Trading Commission issued Friday showed hedge funds, institutional investors and other large speculators increased their short positions in New York copper futures and options in the week ending Tuesday to 29,063 contracts, compared with 25,734 a week earlier and 21,802 three weeks ago. The CFTC publishes such data on a weekly basis.

This is the first time in six weeks that the combined positions show a net short, meaning short positions now outnumber longs.

The rise extends a build-up of copper shorts since early June, which had snapped four straight weeks of decline. Long positions have fallen to 28,750 contracts in the latest CFTC report compared with 42,800 in late May.

“There has been an unnatural buyer of copper, which is the bonded warehouses [in China] doing carry trades. Now, a good chunk of [China’s copper imports] will return to end-use which will likely drive down the price sharply,” a New York-based hedge fund manager said in an e-mail to The Wall Street Journal.

Analysts say one-third or more of Chinese copper imports is believed to be used as collateral for loans from Chinese lenders and some foreign banks. There’s so far been no evidence of a mass sell-off among commodity owners as a result of the Qingdao probe, but traders and analysts say a liquidation of copper stocks may pick up speed if the probe widens.

“The use of copper for collateral was used effectively as an arbitrage tool but it was false demand. It makes perfect sense that international investors would short copper globally now,” said Anthony Skriba, a consulting manager with Shanghai-based investment advisers Z-Ben Advisors.

The short positions are more likely being amassed outside China because the prime-brokerage market on the mainland isn’t as well developed, Mr. Skriba said. Prime brokerage refers to the suite of financial services offered by investment banks and securities firms to hedge funds and other professional investors, including finding counter-parties for short trades.

Hedge funds are likely magnifying rather than creating the bearish momentum on the copper market. Prices of the metal had already come down this year as China’s economy slowed, amid a forecast 9% rise over the next two years in global supplies of copper concentrate, the metal’s raw material, coming mostly from Chile and Africa. London Metal Exchange copper on Friday reached $6,765 a ton, down about 8% since the start of the year.

Goldman Sachs forecast that copper prices are likely to fall to $6,200 a ton by the end of 2014. “Additionally, the Qingdao situation may lead to a rapid unwind in financing deals resulting in a risk that the target forecast is reached earlier than the end of the year,” the bank said in a report.

Traders say they already expect copper and iron ore imports to China to decline in coming months, in part due to customs officials tightening checks on incoming shipments.

“The Qingdao probe has significantly dented confidence across the industry. Banks will likely further cut lending and financing to the metals and mining industry which is already facing severe liquidity strain,” Bernstein Research analyst Vanessa Lau said.

Not all money managers agree with the short-copper positions, as some believe recovering demand from the U.S. could offset the sector’s gloomy outlook. “It’s a cloudy picture but I’d be surprised if copper falls below $6,400 in the short term, barring another macroeconomic shock,” said James Marks, head of global metals at Xconnect Trading Ltd. in London.

Managed money—the CFTC term for hedge funds and institutional investors—had also built up short positions on copper in February and March. They won the bets when copper prices fell by 7% in March and closed out these positions, leading to a resurgence of long positions in late April, according to CFTC data.


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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