Hedge Funds Are Playing 'Dangerous Game' With Copper

Rio Says Hedge Funds Playing Dangerous Game With Copper
  • Rio's copper chief says price isn't reflecting fundamentals
  • Says funds shorting copper as macro bet on China's economy

Hedge funds betting that copper will drop further are playing a “dangerous game” with prices, according to the head of copper at Rio Tinto Group, the world’s second-biggest mining company.

The metal is “not trading on fundamentals,” Rio Copper & Coal Chief Executive Officer Jean-Sébastien Jacques said in an interview in London. “There is lots of short-selling in copper and we’ve seen the pick up in terms of short-selling in copper on the back of what happened in China a few months ago.”

A glut of copper has exacerbated short-selling by hedge funds and China’s move in August to restrict such sales in equities has prompted funds to redirect bearish bets on the nation’s economy to copper, Jacques said. His view echoes Glencore Plc CEO Ivan Glasenberg’s comments last week that the market was being distorted but that supply and demand would eventually prevail. The metal has slumped about 16 percent this year amid a slowdown in China, the biggest user.

Copper has plunged almost 50 percent from a record $10,190 a metric ton set in 2011. The price, at about $5,306.50 now, will drop to an average $4,500 a ton in 2017 and 2018, Goldman Sachs Group Inc. wrote in an Oct. 8 report. Money managers have been betting on lower prices for almost every week since June, U.S. government data show.

“We continue to strongly recommend producers increase the hedging of their
copper exposure and investors either reduce long exposure or take out long-dated short exposures in copper,” Goldman Sachs analyst Max Layton said in the report.

The rout has prompted miners including Glencore and Freeport-McMoran Inc. to cut back less-profitable production. Stockpiles of copper tracked by the London Metal Exchange have dropped to a seven-month low, another sign that supplies may be tightening. Prices will remain volatile until a deficit returns in 2017 or 2018, Rio’s Jacques said.

“It can be a very dangerous game in the medium and long term,” he said. “You don’t want to have a short position when the market moves into a deficit. From an industry standpoint, the sooner we move back into a deficit situation the better it is because currently there is a lot of noise in the system.”

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