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Chinese commodities funds see weaker metals, yuan; eye oil, agriculture

[SHANGHAI] Chinese commodity funds see further falls in metal prices in 2016, but are eyeing potential buying opportunities in agricultural products and oil as beaten-down prices near the bottom of the cycle, fund sources said.

As turmoil around China's falling yuan hits world share markets, many fund managers expect further weakness in the currency, and plan to increase their hedging or start taking out currency protection for the first time. "We are certain the Chinese economy will grow only slowly and that the yuan will depreciate in 2016," said a senior trader with a Shanghai-based fund. "The biggest uncertainty we have is how much the yuan will depreciate, which could revalue metals in China and affect our bets." At least three large funds involved in commodities trading are betting on further weakness in base metals due to a continued slowdown in domestic economic growth.

However, supply cuts by global and domestic producers as well as stockpiling by the Chinese government could lead to periodic price rebounds over the year.

Chinese funds, which cut bets on commodities last year to trade the red-hot equities markets, returned to the market after a mid-year equity rout but see no return of the China-led super cycle. "The demand from other growing economies in coming years won't have the size and growth speed of China's over the last 10 years," said a senior executive at a Shanghai-based firm. He declined to be named due to his firm's policy.

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He planned to maintain short positions in metals until both local and international producers start to seriously curb output and global supplies edge towards a deficit.

A trader with a Shanghai-based fund said his company was looking to take advantage of small fluctuations in prices, with fewer opportunities for large positions likely this year. "Over the longer-term, we remain bearish on industrial metals as we do not expect the government's structural reform on the supply side to achieve the required effect. But we might see some good opportunities emerging from oil and petrochemicals futures." The number of Chinese private funds trading commodity futures has grown rapidly over the past two years. Heavy short-selling was blamed for driving down copper, aluminium and nickel prices on the Shanghai Futures Exchange last year, prompting some smelters to call for restrictions on the practice.

One large fund, along with a mid-cap fund, saw opportunities in agricultural products as the El Nino weather pattern curbs output in key exporting countries such as Australia and Brazil, sources at the funds said. "Agriculture prices are already low and supply can be easily interrupted seasonally, which could cause price fluctuations,"said Liang Yong, an analyst with China's Galaxy Futures.

But he warned that opportunities might be limited, with global demand relatively weak and supplies still plentiful.

Buy-side opportunities are also seen in the oil market this year after a 70 per cent price plunge over the past 18 months, two fund sources said.

Crude oil prices hit an 12-year low on Thursday, and funds said their bets on oil could change course in 2016. "Oil may rebound faster than people think, with geopolitical risks returning ... including the stand-offs between Saudi Arabia and Iran," said an independent oil fund manager. "As for OPEC, it remains to be seen if they will maintain the same stance," he added, referring to a decision by the Organization of the Petroleum Exporting Countries not to cut output in an effort to defend market share.