Photographer: Oliver Bunic/Bloomberg

Copper Skeptics Boost Bearish Wagers, Defying Rally for Prices

  • Goldman, Barclays predict that recent gains won't last
  • `There's no question that global growth is hiccuping'

While copper prices have rallied in four of the past five weeks on the prospect of improved industrial demand in China, hedge funds are skeptical that recovery will last.

The funds and other large speculators have bet on declines for the metal since October. Last week, the net-short position in copper holdings grew for the first time since mid-January, even as the metal advanced.

Doubts over a sustained rebound echo the outlook of Goldman Sachs Group Inc., where analysts predict that the metal will drop at least 10 percent by the end of the year. Copper posted a third straight annual loss in 2015, falling by the most since the depths of the global recession in 2008. The slowest economic expansion in a generation for China, the world’s biggest consumer, has eroded demand and spurred a supply glut.

“There’s no question that global growth is hiccuping right now,” said Michael Cuggino, the San Francisco-based president an portfolio manager at Permanent Portfolio Family of Funds Inc., which oversees about $3 billion. “Copper hasn’t moved that much. The dynamics are very typical of what you see in the trough of a commodities business cycle.”

Bearish Bets

Investors increased their net-short holdings in copper to 7,672 U.S. futures and options in the week ended Feb. 16, according to Commodity Futures Trading Commission data released three days later. That compares with 7,134 a week earlier. Long wagers slumped 9.1 percent to 33,217 contracts, the biggest drop since Nov. 3. While prices traded in New York rose 2.4 percent to $2.0805 a pound last week on the Comex, the metal is still down about 20 percent over the past 12 months.

Global inventories monitored by exchanges in New York, London and Shanghai jumped 4.6 percent last week to 547,004 metric tons. The gains were driven by increases at Chinese warehouses. The stockpiles tracked by the Shanghai Futures Exchange grew by 15 percent, the biggest gain in a year, signaling that the Asian country is well supplied.

Weak demand in China will keep copper trapped in a bear market through 2018, Goldman analysts wrote in a Feb. 8 report. The bank forecasts that a global surplus of the metal will grow to 665,000 tons this year, from 339,000 tons last year. The oversupply will expand again in 2017, the analysts including Max Layton said.

Risks to the U.S. and European economies will also make it difficult for prices to sustain recent gains, Dane Davis, an analyst at Barclays Plc in New York, said in a Feb. 15 report. U.S. manufacturing shrank in January for a fourth consecutive month, the Institute for Supply Management’s index shows. That’s the longest stretch of contraction since 2009.

Bright Spot

The bright spot for copper bulls may come from Chinese policy makers. The People’s Bank of China loosened restrictions on what banks could pay on deposits and charge for loans. The nation’s chief planning agency is also making more money available to local governments to fund infrastructure projects, according to people familiar with the matter.

Even as manufacturing in the country slows, gains for consumption and a stabilizing housing market could help metals demand to recover, said Frances Hudson, an Edinburgh-based global thematic strategist at Standard Life Investments, which oversees $393 billion. China copper imports in January were 6.1 percent higher than a year earlier, the latest trade data show.

“We just have to remind ourselves that China hasn’t actually stopped growing, it’s just stopped growing by double digits,” Hudson said. Still, because mining companies overproduced, there “aren’t any signs” of the glut ending, she said. “It’s pretty much an excess-supply story.”

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