Funds Buy Copper on Speculation China to Cover Bets 2005-11-24 09:33 (New York)
By Claudia Carpenter
Nov. 24 (Bloomberg) -- Hedge funds including Winton Capital
Management are buying copper on speculation China will purchase
the metal to cover wrong-way bets by a government trader.
Speculators helped send prices to a record high last week,
saying China may need to buy as much as 200,000 tons of copper to
cover losing bets by trader Liu Qibing. China's losses may run
into hundreds of millions of dollars and are the result of Liu's
personal actions, not those of the government, according to the
state-run China Daily.
``Somebody's going to have to make the deliveries, and
they're going to have to buy them at much higher prices,'' said
Stuart Flerlage, managing principal at New York-based Patronus
Capital, a commodity fund invested in copper futures.
China, the world's biggest user of copper, has sold metal it
doesn't own on expectations the price will fall, said Wang Zheng
from Shanghai Dalu Futures Co. today. London prices have risen 33
percent this year and reached a record $4,243 a ton Nov. 18. They
increased as much as 2.3 percent today and hedge funds expect the
rally to continue as China covers bets and demand outstrips
supply.
``We've been long all the way up the bull market so far, and
the bull market is still on as far as we're concerned,''
according to David Harding, a principal at London-based Winton
Capital Management. Its fund, with $4 billion under management,
is up 6 percent this month as copper rose. Traders are long a
commodity if they own it and short if they have sold what they
don't own.
Deliveries
Liu, who hasn't been seen publicly since October, built
positions of between 100,000 and 200,000 tons of copper, which
must be delivered to international markets by Dec. 21, the China
Daily said Nov. 17, citing an unidentified official. The
commitment may exceed publicly reported inventories by 60,000
tons.
David Threlkeld, president of trader and adviser Resolved
Inc. in Scottsdale, Arizona, said hedge funds including Red Kite
Management, Vega Asset Management LLC, Ospraie Management LP and
Touradji Capital Management LP, all in New York, are buying
copper.
``The market has been tight all year, and there is very
little copper about,'' said Red Kite's Michael Farmer, the
London-based former joint chief executive of MG Plc, which was
the world's largest copper-trading company in 2000 before its
acquisition by Enron Corp.
``My concern is not that the Chinese default,'' said
Resolved's Threlkeld. ``My concern is that the hedge funds may
default because their only exit plan is to squeeze the Chinese.
But what happens if the Chinese make the deliveries?''
Funds
Vega's Jonathan Berg declined comment, and calls to
Ospraie's Dwight Anderson and Touradji's Paul Touradji weren't
returned.
About half of trading volume on the London Metal Exchange is
by hedge funds, according to Barclays Capital. Open interest in
copper on the London Metal Exchange has jumped 4 percent since
Nov. 17 to 213,599 contracts. That's an increase of 8,137
contracts, or 203,425 tons of copper, exchange figures show.
Open interest is the number of contracts that have not been
closed, liquidated, or delivered.
Prices will probably extend their rally because global
demand continues to outpace supply, say analysts such as Ingrid
Sternby from Barclays Capital. ``We see the upside trend
continuing at least over the next quarter,'' Sternby said in an
interview today. ``Global inventories of copper are staying
low.''
Inventories
China has copper inventories that it can use to deliver
against the contracts, said Threlkeld. The country has been
buying the metal for the last four years, and what it doesn't
consume, it stockpiles, he said in an interview Nov. 23.
``Let's say it's long anywhere between 700,000 and 1 million
tons of physical copper in China and let's say that Liu has a
short position of between 100,000 and 200,000 tons, that's
nothing because overall China is long copper,'' said Threlkeld.
Liu's bet on copper ``obviously was a speculative
position,'' said Brian O'Shaughnessy, chief executive of Revere
Copper Products Inc. in Rome, New York.
O'Shaughnessy, whose company sells about $200 million of
copper components a year in the U.S., Europe and Asia, said China
probably will find a way to satisfy part of the obligation with
deliveries and then roll over the rest to a later date.
Hedge funds and other large speculators increased their net-
long positions in New York copper futures in the week ended Nov
15, according to the U.S. Commodity Futures Trading Commission.
Speculative longs, or bets prices will rise, outnumbered shorts
by 7,527 contracts on the Comex division of the New York
Mercantile Exchange. Net-long positions rose by 1,788 contracts,
or 31 percent, from a week earlier.
Liu has been under house arrest since mid-October, the
Economic Observer, a provincial government newspaper, said this
week. Messages and e-mails sent to his mobile and landline phones
haven't been answered. His mobile phone is switched off.
--Editor: Poole (sds, slw). |
