By Javier Blas in London
Published: October 10 2010 22:20
China is sitting on a profit of nearly $1.5bn from a bold trading strategy in copper based on expectations of an emerging markets-led boom.
Beijing’s bet that a ‘super-cycle’ in metals markets would keep copper prices high, despite the financial crisis, has paid off, according to dealers’ calculations. The substantial paper profits come after China’s State Reserves Bureau, the official body in charge of the country’s strategic commodities reserves, mopped up copper surpluses last year when the crisis was at its worst and prices had tumbled.
As demand for metals has recovered, copper markets have tightened dramatically and prices have soared.
Metals traders estimate that the SRB bought between 250,000 and 300,000 tonnes of copper, equal to nearly 2 per cent of global annual production, in early 2009 at a price of less than $3,500 a tonne. The SRB does not disclose its purchases. As copper prices rose last week to a two-year high of $8,349 a tonne, traders and industry executives calculated Beijing’s paper profits to be about $1.2bn-$1.5bn.
Traders and analysts believe China is preparing to cash in on its paper gains soon. Joshua Crumb, metals analyst at Goldman Sachs, said China’s SRB was likely to “prudently sell or lend metal” to keep a “lid on price spikes over the next few quarters”. The gains are a coup for the SRB after big losses in 2005, when an executive working for its trading arm, Liu Qibing, built a short position in copper – or bet on falling prices – equal to between 100,000 and 200,000 tonnes. The losses prompted the SRB to overhaul its trading “to avoid more huge losses on investments”.
China has never explained, or acknowledged publicly, its buying. But mining executives and traders familiar with the SRB said it had bet that a ‘super-cycle’ of high metals prices, powered by urbanisation and industrialisation of emerging economies, would survive the effects of the financial crisis.
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Copper prices have risen to within 6.6 per cent of their all-time high of $8,940 a tonne, set in July 2008, as demand from emerging countries and disappointing mine supplies have tightened the market. Analysts believe prices will reach a fresh all-time high, with banks and consultants forecasting prices of $9,000-$11,000 in 2011. The rise in copper and other base metals prices will dominate this week’s London Metal Exchange Week, the metals and mining industry’s annual gathering. The LME index, a basket tracking lead, aluminium, copper, nickel, tin and zinc prices, last week hit its highest level in two years.
Copyright The Financial Times Limited 2010.
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