Tough times: Trucks from the Chinese-owned Las Bambas mine on the road between Sayhua and Ccapacmarca in Peru. The past six months could be among the worst performing periods in the trading careers of many of those gathering in Hong Kong. — Reuters
LONDON: As copper surged to record highs last month, several senior Chinese traders started trying to contact western hedge fund managers whose names they’d only read in the press.
For years, the veteran traders’ privileged insight into their own economy had given them an edge in the copper market, where China accounts for more than half of global demand.
But now they were bewildered. Everything in China pointed to a market that should be slumping, and yet prices were soaring on a wave of speculative money. What were they missing?
The approaches – direct and through intermediaries, to fund managers like Pierre Andurand and Luke Sadrian who had made a splash as some of the market’s biggest bulls – highlight the tug of war that has gripped the copper market in the past few months.
On one side are bullish fund managers in London and New York, who have plowed 10s of billions of dollars into copper with an eye to future shortages.
On the other are Chinese purchasers, more focused on the here and now, who have rarely if ever been so gloomy.
For the Chinese traders, it has been a humbling experience.
The downbeat mood at home had persuaded them to bet against international copper prices. Then a wave of investor buying pushed prices to a record, and traders who fancied themselves the smartest players in the market were wiped out.
“This year has been tough for Chinese traders,” Tiger Shi, managing director at broker Bands Financial Ltd, said in an interview last week.
“Their vaunted information advantage over the Chinese physical market didn’t bring them the rewards they imagined.”
But now, as the dust settles on last month’s frenzy, the importance of the Chinese market has reasserted itself.
Prices have dropped about 13% from the peak above US$11,100 a tonne, as speculators sharply reduced their bullish bets in the wake of the surge – with much of that reduction driven by trend-following funds, according to traders.
Without western investors buying, all eyes are back on China, and a copper market that several industry insiders said is still the weakest they’ve ever seen it.
The tug of war between the two is likely to determine where copper prices go next.
If tentative signs of a recovery in Chinese buying are sustained, some copper bulls believe the market could be gearing up for fresh record highs in the second half of the year.
But if weak Chinese orders persist, it would suggest that the soft patch is not just a result of delayed buying, but an indicator of poor underlying demand.
Prices could fall even further – back to US$9,000 or even US$8,000 a tonne, according to the most bearish traders.
It’s a dynamic that’s likely to dominate conversations as more than 1,000 smelter executives, traders, bankers and analysts are set to gather in Hong Kong this week for the London Metal Exchange’s annual Asia party.
It’s traditionally an occasion for western investors to glean insight into Chinese fundamentals, but this year Chinese traders are likely to be just as interested in better understanding their counterparts.
It’s also a sign that, after more than two decades in which China’s industrialisation and urbanisation has been the major driver of the copper market, the situation is evolving as the electrification of everything gobbles up greater volumes of copper the world over.
Among Chinese copper traders and the fabricators who shape raw metal into pipes, wires and other parts used in everything from air conditioners to power transmission cables, the mood remains overwhelmingly gloomy.
Even though some of the people Bloomberg spoke to in the past two weeks said they had seen a recent uptick in demand, they were reluctant to suggest that the market is turning around.
“This could be the most difficult year during my over-a-decade industry history,” said Ni Hongyan, vice-general manager at trading firm Eagle Metal International Pte.
“Business is shrinking significantly. The physical sales business is very bleak,” she said.
The data paints a similar picture. Copper in Shanghai’s tax-free bonded zone has been selling at a highly-unusual discount to London Metal Exchange prices for more than a month.
That was painful for many Chinese merchants, who consider the second quarter the peak season for fabricators to purchase and prepare raw material stocks after the annual political meetings of the country.
Instead, copper inventories on the Shanghai Futures Exchange have risen by 78% since the end of Chinese New Year to a record high for this time of the year. — Bloomberg
