Hedge funds bail on copper as Goldman sees 'supply storm'

New York

COPPER is stuck in a rut. While other metals have shone in 2016, copper has struggled to gain traction and last week erased its gains for the year. Demand in China, the world's biggest user, is slowing just as Goldman Sachs Group Inc predicts a "supply storm" will hit the market and drag prices even lower.

Stockpiles of the metal are ballooning, further pointing to a demand slowdown. Inventories monitored by the London Metal Exchange have jumped to a 10-month high. Supplies are likely moving out of China and into warehouses tracked by the LME, Commerzbank AG said in a report on Aug 24. The hoard underscores why money managers are betting on more price declines.

"There's just no stomach for investors to push their longs in copper," said Bob Minter, a Philadelphia- based investment strategist at Aberdeen Asset Management, which oversees US$402 billion. As demand slows, "the second half of the year is traditionally a challenging time for many of the industrial commodities, so seasonality is working against copper at this point too", he said.

Hedge funds and other large speculators held a net-short position, or bets on price declines, of 4,991 US copper futures and options contracts in the week ended Aug 23, according to Commodity Futures Trading Commission data released three days later. They switched from a net-long position, or wagers on a rally, of 2,237 a week earlier. Futures traded on the Comex in New York rose as much as 0.3 per cent on Monday, after falling 4.3 per cent last week to US$2.0845 a pound on Friday. Prices are down 2.2 per cent this year.

Copper will fall below US$2 before the end of the year, Dane Davis, an analyst at Barclays plc, said in a telephone interview. The market will face a "difficult time" in the second half after China front-loaded its economic stimulus and the efficacy of such measures starts to fade, he said.

There are already signs of China's wavering demand. The country's imports of refined copper shrank in July to the smallest in 17 months, while exports jumped five-fold from a year earlier, customs data shows. Metal was probably leaving the country at a similar pace this month, evidenced by the gain in LME inventories, Commerzbank said.

As demand falters, supplies are set to increase. Production from the companies Goldman Sachs tracks, which account for 60 per cent of global mine supply, expanded 5 per cent in the first half, analysts led by Jeff Currie wrote in a report on Aug 4. Output will rise as much as 15 per cent in coming quarters, signalling the copper market is "entering the eye of supply storm", the analysts said.

Not everyone is expecting the supply increases. Citigroup Inc said the gain in mine production during the first half was mostly driven by a 52 per cent jump in Peruvian output, and growth from those projects will likely "fall off" in the second half. The one million tonnes of additional supply expected by 2020 won't be able to meet the growth of 1.6 million tonnes in demand, analysts including David Wilson wrote in a report on Aug 16.

And while consumption is slowing in China, there are pockets of optimism elsewhere. In the US, the No 2 copper user, the two leading presidential candidates pledged to step up spending on infrastructure if elected. In Japan, Prime Minister Shinzo Abe's government will spend 6.2 trillion yen (S$82.6 billion) on infrastructure.

"Copper is very important in infrastructure building, so if some of these countries decide they need to start repairing a lot of their infrastructure, that would be a big help for" demand, said John Kinsey, a Toronto- based fund manager at Caldwell Securities Ltd., which oversees C$1 billion (S$1.05 billion). "With the closures of the uneconomic mines, when the pick-up does come, there will be a shortage initially. And of course, additional supply does come on eventually, and then there's too much supply and then the cycle starts again." BLOOMBERG