Hedge funds betting that copper will drop further are playing a â€œdangerous gameâ€ with prices, according to the head of copper at Rio Tinto Group, the worldâ€™s second-biggest mining company.
The metal is â€œnot trading on fundamentals,â€ Rio Copper & Coal Chief Executive Officer Jean-SÃ©bastien Jacques said in an interview in London. â€œThere is lots of short-selling in copper and weâ€™ve seen the pick up in terms of short-selling in copper on the back of what happened in China a few months ago.â€
A glut of copper has exacerbated short-selling by hedge funds and Chinaâ€™s move in August to restrict such sales in equities has prompted funds to redirect bearish bets on the nationâ€™s economy to copper, Jacques said. His view echoes Glencore Plc CEO Ivan Glasenbergâ€™s comments last week that the market was being distorted but that supply and demand would eventually prevail. The metal has slumped about 16 percent this year amid a slowdown in China, the biggest user.
Copper has plunged almost 50 percent from a record $10,190 a metric ton set in 2011. The price, at about $5,306.50 now, will drop to an average $4,500 a ton in 2017 and 2018, Goldman Sachs Group Inc. wrote in an Oct. 8 report. Money managers have been betting on lower prices for almost every week since June, U.S. government data show.
â€œWe continue to strongly recommend producers increase the hedging of their
copper exposure and investors either reduce long exposure or take out long-dated short exposures in copper,â€ Goldman Sachs analystMax Layton said in the report.
The rout has prompted miners including Glencore and Freeport-McMoran Inc. to cut back less-profitable production. Stockpiles of copper tracked by the London Metal Exchange have dropped to a seven-month low, another sign that supplies may be tightening. Prices will remain volatile until a deficit returns in 2017 or 2018, Rioâ€™s Jacques said.
â€œIt can be a very dangerous game in the medium and long term,â€ he said. â€œYou donâ€™t want to have a short position when the market moves into a deficit. From an industry standpoint, the sooner we move back into a deficit situation the better it is because currently there is a lot of noise in the system.â€