Chinese funds take cautious bets on short-term metals price rise

HONG KONG (Reuters) - Some big Chinese commodity funds are positioning for a short-term uptick in metals prices despite a poor longer-term outlook, expecting supplies to tighten over the next three to six months as Beijing acts to strengthen its economy.

A worker loads copper cathodes into a warehouse near Yangshan Deep Water Port, south of Shanghai March 23, 2012. REUTERS/Carlos Barria

Chinese commodity funds have been blamed for pulling down copper prices in particular the last two years, but at least two large funds have started backing away from bearish bets on metals.

Sources at three large funds said some fund managers had covered part of their short positions on iron ore and nonferrous metals futures over the past week, hedging for the possibility that prices might rise in the short-term.

The market could tighten noticeably, the sources said, as demand picks up due to government infrastructure projects and stockpiling - just as nonferrous supplies start to fall due to cuts by Chinese smelters. Copper, aluminum, nickel and zinc producers have announced planned cuts.

“Recently the overall views among funds are leaning towards bullish on metals ... for the next three to five months,” said a source at a large fund in Shanghai.

“Like us, many have covered shorts these days. Some may have even opened small long positions.”

The three sources all declined to be identified due to company policy.

Data from the Shanghai Futures Exchange showed that the volume of short positions on copper and aluminum futures had dropped 2-4 percent since the beginning of December.

State media have reported that the government will introduce measures to make its monetary policy more flexible in 2016, expand its budget deficit to support a slowing economy and push forward “supply-side reform”.

As part of these measures, Beijing is expected to increase liquidity and help finance stockpiling of some metals, including aluminum and copper in the first quarter, the fund source in Shanghai said.

Increased property sales and infrastructure projects could also mean that demand for copper, nickel and other industrial and construction metals could rise, traders said.

If stockpiling is financed, the copper market might see rapid erosion of its surplus towards the second quarter of next year as supply goes into storage, a portfolio manager at another large fund in Shanghai said.

The government stimulus measures mean that economic activity in China could pick up briefly in the first half of 2016, the manager also said, although he added that overall economic growth next year would be slow.

Copper prices, hovering at six-year lows in the second half of this year, have risen about 3 percent in domestic and international markets since Thursday last week.

However, some funds think even the short-term outlook remains weak, because of the overall poor fundamentals.

“The current (short-covering) is news driven,” said a source at a large fund in the eastern province of Zhejiang, adding that the company doubted producers would stick to their announced cuts or that the central government would allot sufficient funds for the stockpiling.

Chinese funds active in metal futures trading include DH Fund Management and Shanghai Chaos Investment Group, brokerage sources have said.

Editing by Henning Gloystein and Tom Hogue