Hedge Funds’ Bullish Copper Bets Run Into China’s Slowdown

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(Bloomberg) — As copper rose to record levels last month, many top Chinese traders began trying to contact Western hedge fund managers whose names they had only read in the press. For many years, seasoned traders’ distinctive view of their economy gave them an advantage in the copper market, where China accounts for more than half of global demand.

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But now they were confused. Everything in China was pointing to a market that was bound to decline, and yet prices were soaring on a wave of speculative money. What were they missing?

The approaches – direct and through brokers, with fund managers such as Pierre Andurand and Luc Sadrian having achieved great success as two of the market’s biggest bulls – highlight the tug of war that has gripped the copper market in the past few months.

Read: Hedge funds Andurand and Rokos took big bets on copper ahead of the rally

On the one hand, there are the optimistic fund managers in London and New York, who have invested tens of billions of dollars in copper with an eye toward future shortages. On the other hand, there are Chinese buyers, who are more focused on the present, and who have rarely, if ever, been so pessimistic.

For Chinese merchants, this was a humbling experience. The pessimistic mood at home convinced them to bet against global copper prices. Then a wave of investor buying pushed prices to a record high, and traders who thought of themselves as the smartest players in the market were wiped out.

“This year has been difficult for Chinese traders,” Tiger Shi, managing director of brokerage firm Bands Financial Ltd, said in an interview last week. “The informational advantage they vaunted over China’s physical market has not brought them the rewards they imagined.”

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But now that the dust has settled from last month’s madness, the importance of the Chinese market has been reaffirmed. Prices have fallen about 13% from a peak of more than $11,100 a tonne, as speculators sharply cut their bullish bets in the wake of the rally – and most of that decline was driven by money following the trend, according to traders.

Without Western investors buying, all eyes will be back on China, and a copper market that many industry insiders say remains the weakest ever.

A tug of war between the two will likely determine the next direction for copper prices: If initial signs of a rebound in Chinese purchases continue, some copper bulls believe the market could be poised for new record highs in the second half of the year. .

But if weak Chinese orders persist, it suggests that the soft correction is not just a result of delayed buying, but rather an indicator of weak underlying demand. Prices could fall further – to $9,000 or even $8,000 per ton, according to the most bearish traders.

It’s a dynamic that is likely to dominate the talks as more than 1,000 executives, traders, bankers and analysts are scheduled to gather in Hong Kong this week for the London Metal Exchange’s annual Asian gala. It is traditionally an occasion for Western investors to learn about Chinese fundamentals, but this year Chinese traders are likely to be interested in better understanding their counterparts.

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It’s also a sign that after more than two decades in which China’s industrialization and urbanization were the main drivers of the copper market, the situation is evolving as the electrification of everything eats up larger quantities of copper worldwide.

Among Chinese copper traders and manufacturers who shape the raw metal into pipes, wires and other parts used in everything from air conditioners to power transmission cables, the mood remains largely bleak.

“Business is shrinking dramatically. The physical sales business is very bleak.”

Although some people Bloomberg spoke to in the past two weeks said they had seen a recent spike in demand, they were hesitant to suggest the market had begun to turn.

“This year may be the most difficult in my more than a decade-long history in the industry,” said Ni Hongyan, deputy general manager of trading company Eagle Metal International Pte. “Business is shrinking dramatically. The actual sales business is very bleak,” she said.

The data paints a similar picture. Copper has been selling in Shanghai’s tax-free bond zone at an extremely unusual discount to London Metal Exchange prices for more than a month. This was painful for many Chinese traders, who consider the second quarter to be the peak season for manufacturers to buy and prepare raw material stocks after the country’s annual political meetings. Instead, copper inventories on the Shanghai Futures Exchange have risen 78% since the end of the Chinese New Year to reach a record high for this time of year.

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China’s refined copper market is weaker than it has ever seen before – “by a long shot,” a senior executive at one of the world’s largest metals trading companies said.

Khaha

The disconnect between the Chinese market and Western investors has been building for several months. Investors and analysts battled each other to make the most optimistic prediction for copper prices amid expectations of rising demand from the energy transition and challenges boosting mine production. A series of reports estimating the massive amounts of copper needed for AI data centers has added to the craze.

Goldman Sachs Group said that copper is located in the “foothills of Mount Everest,” expecting prices to average $15,000 per ton next year, while Andurand expected the price of copper to reach $40,000.

The situation came to a head in May. With China’s copper prices lagging behind global prices, many local traders were betting that the gap would narrow, shorting international copper contracts and buying stocks in the Shanghai market. After their brokers refused to open new short positions in London to avoid exposure to volatility during a week-long Chinese holiday, some traders placed bearish bets on the Comex in New York instead.

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But as investor money continued to flow into the market, especially US copper futures contracts in New York, Chinese traders were caught in a short crisis. Faced with rising copper prices, they were running out of cash flow and had no choice but to give up, causing an unprecedented explosion in New York futures, leaving them trading well above other price benchmarks.

Since then, the Chinese market has reasserted itself.

Chinese copper exports hit a record high of 149,000 tons in May. LME shares in South Korea and Taiwan – the closest locations to China – rose. Traders were rushing to ship copper to the US to arbitrage the price differential – even though none of it had yet appeared in inventories registered with the COMEX.

‘Not there yet’

In compiling this account, Bloomberg spoke to more than a dozen senior figures in China’s copper trading industry, most of whom requested anonymity to discuss private information.

Many traders gathered in Hong Kong this week will still be nursing their wounds. Many of them said the past six months may have been among the worst performing periods of their copper trading careers.

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For the broader market, the key question is what happens next.

In China, some traders say there are tentative signs of rising buying in the past two weeks, a move that, if it continues, could put a floor on prices. SHFE copper inventories have fallen over the past two weeks, albeit by a modest 14,000 tons. Beijing is also set to announce more long-term political support for the economy at a key Communist Party meeting next month, which is expected to boost demand for raw materials such as copper.

Wang Wei, general manager of major copper trading company Shanghai Wuray Metals Group, which sells refined copper to hundreds of Chinese manufacturers, said demand is “recovering slightly,” although it will return to similar levels from a year ago.

But there are still reasons to be concerned about China’s primary copper consumption. Real estate is a key driver of copper demand, and weakness in the Chinese sector is likely to continue to be a drag, according to Eugene Chan, trading director at Zhejiang Hailiang Co., Ltd. There are also some indications that higher prices are stimulating a greater boost in copper demand. Replace copper with aluminum.

“The influx of net new financial markets has become thin. Without this incremental macro-driven buyer, it is a question of whether the underlying physical market can support the current price,” said Colin Hamilton, managing director of commodities research at BMO Capital Markets. “We have to reset the bar to bring back those buyers, and we’re not there yet.”

-With assistance from Mark Burton.

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