Chinese fund doubles down on copper short

One of the Chinese funds reckoned to be behind a precipitous fall in the price of copper at the start of the year has not followed its peers and closed its bearish bets on the industrial metal.

Chaos Ternary Futures, a unit of Shanghai Chaos, remains the biggest holder of short contracts on the Shanghai Futures Exchange, with 24,679 contracts, equivalent to 123,395 tonnes of the red metal, up from 9,996 contracts at the beginning of the year. Short contracts are bets that the price will fall.

The January sell-off highlighted the power of Chinese funds in global commodities markets. They helped push the metal down to a five and half year low of $5,400 a tonne, using a period of weak demand before Chinese new year to execute their trade.

However, the copper price has rebounded strongly since then. Boosted by a weaker US dollar and a number of supply disruptions, which have hit output at several of the world's biggest copper mines, it has risen 19 per cent since January.

On Tuesday, copper for delivery in three months on the London Metal Exchange was trading up $43 at $6,424 a tonne.

Other factors have also played a part. There has been a burst of short covering by other hedge funds, some of which have turned bullish on the metal. The reversal in copper has also been driven by hopes China will deliver fresh measures to stimulate its slowing economy.

By the end of last week the speculative net long position in copper on the London Metal Exchange had reached its highest level this year, a strong reversal from January when shorts were at the highest since 1998, according to estimates from broker Marex Spectron.

Data from Comex in New York shows there are almost three times as many longs as shorts in copper, which is traded on three main markets around the world.

"Things have swung against the shorts in a big way . . . it will be interesting to see how aggressive they are prepared to be at these levels," said Vivienne Lloyd, an analyst at Macquarie.

The position of Shanghai Chaos, which started going short in November in Shanghai, has more than doubled since January. However, it is not clear if it has offsetting positions in other markets around the world.

"There aren't many traders who can run a massive short position in the face of that [the rising copper price]," Guy Wolf, global head of market analytics at Marex, said. "Most risk management processes require you to close losing positions not double them. If the Chinese are in an easing cycle it could be a dangerous game to be short, plus the dollar rally which was helpful to copper bears is going the other way."

Over the weekend, China cut interest rates for a third time in six months in a further attempt to shore up its slowing economy.

"I don't think any of them have changed their view that the growth outlook remains very challenging and the stimulus is all very nice but it's not going to make a fundamental difference," said one market participant in reference to Shanghai Chaos.

Speculative financial interest in copper has increased rapidly in recent years. JPMorgan calculates that open interest in copper on three main metal exchanges - LME, CME and SHFE - has risen from about 7m tonnes in 2006 to about 12.5m in 2014. But the share being traded on SHFE has risen from about 6 per cent in 2006 to roughly 26 per cent in 2014.

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