20 November

It’s been a rocky road for commodities in 2015, with OPEC fighting a war of attrition against competitors and metals being battered by China’s slowing growth. Copper is no exception, hitting six-year lows  of $4,590 per tonne on 17 Nov.

Confidence in copper has rapidly decayed –  a lot of Chinese money is betting on a decline in the price of the commodity as metals in general get heavily shorted by Chinese investors. As China moves away from its ‘old’ manufacturing-based economy to a more service-based one, steel, nickel, and zinc have suffered too, with zinc in particular also hitting six year lows in mid-November.

The price of copper could plunge even further as dollar-denominated metals are hit by the Fed’s proposed interest rate hike in December, which looks likely with decreasing unemployment and macroeconomic data looking up for the U.S. But arguments can be made now that might provide support to an already heavily discounted sector.

A slow and steady path towards tighter policy set in motion this December could see impatient fixed income investors abandon their US treasuries in search of better bets elsewhere, since a very small rise in interest rates would no doubt be followed by a long, drawn out and irregular sequence of more very small rate rises. In doing so, they’d also abandon the US Dollar. Less demand for a currency lowers the value of that currency and with huge numbers of investors long the US Dollar, an en-mass exit could send the currency off a cliff.

So is now the time to follow Chinese investors and short copper and similar commodities? If it is, it might not be so for much longer. Shares in UK Index miner Antofagasta shot up on 17 Nov, despite a still widely bearish outlook on copper, after a Goldman Sachs upgrade. Shares in Anglo American and Glencore followed suit. Investors may already be coming round to the idea that a US rate rise might do the exact opposite to what most have been expecting.

If copper’s short term bounce is merely the result of a short squeeze, that’s interesting too. It could mean it’s time to go short again, but if short investors are taking profits it means they think the price hasn’t got much further to fall. The time will come to buy back into commodities. The question is of course when, and while the future is always hard to predict, ‘when’ may not be as far off as people think.

Duke Fay & Augustin Eden