Photographer: Charles Pertwee/Bloomberg

One of the Last Metal Hedge Funds Says China to Bring More Pain

  • Paul Crone says market set for "fresh muti-year lows"
  • Production cuts not yet enough to offset weak demand

The biggest rout in industrial metals since the financial crisis is set to deepen as mining companies fail to cut production enough to make up for slowing demand, according to Citrine Capital Management LLC.

“We could make fresh multi-year lows across metals in the next six months,” Paul Crone, founder of Citrine, said in an interview this week.

New York-based Citrine is one of the few surviving hedge funds investing exclusively in metals, alongside Red Kite Group. Galena Metals Fund, the flagship fund owned by trading house Trafigura Pte., closed last month due to “difficult conditions prevailing on commodities markets.”

Mining companies had boosted production as prices of everything from aluminum to tin surged on booming growth over the last decade in China, the world’s biggest metals user. With China’s economy slowing, there is too much supply, and producers including Glencore Plc and Freeport-McMoRan Inc. have said they will curtail output.

A London Metal Exchange index tracking the price of copper, aluminum, nickel, zinc, lead and tin fell last month to a six-year low. The gauge is down 27 percent in 2015, set for the worst annual performance since 2008 and highlighting the struggles to remain profitable for metal producers including BHP Billiton Plc, Rio Tinto Plc and Glencore.

The hedge-fund manager said that while low prices are beginning to trigger supply cuts, the market is questioning “how real” the reductions will be and whether producers will adequately follow through on their pledges. At the same time, consumption growth remains lackluster, particularly in China.

“I don’t see an uptick in real demand in the very short-term,” he said. “China is worse than the market had anticipated.”

Crone, who founded Citrine in 2012 after seven years as head trader at commodities hedge fund Touradji Capital Management LP, said the metals market was “in a structural bear market that is going to continue a bit longer.” At the same time, prices are already “so low that the risk-reward of taking a bearish position is getting diminished.”

Copper, which has fallen 27 percent this year through Wednesday, could drop an additional 15 percent in 2016, Crone said. The outlook would add to the gloom for producers such as Freeport and Chile’s state-owned Codelco, which have been cutting costs to make up for the price declines.

Prospects for zinc and nickel are more positive, he said.

"Zinc could be the biggest bullish opportunity for 2016,” Crone said. “A price rally is a question of when rather than if," as the market moves into a deficit in the second half of 2016. The market will first need “to eat through high levels” of stockpiles before nickel prices rally, he said.

Citrine’s returns are up for the year, and its assets under management have remained stable, Crone said, declining further comment. Hedge funds betting on commodities are heading for their worst performance in seven years, after losing 4.6 percent in the first 10 months of 2015, according to the Newedge Commodity Trading Index. The losses and investor withdrawals have left assets at the top 10 commodities hedge funds at less than $10 billion, compared with more than $50 billion in 2008, according to estimates from Trafigura.

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