Commodities Comment:Digging into Chinese fund positioning in base metal markets

The copper price underperformance since the beginning of 2015 is clear.

    While much of this can be attributed to weaker demand conditions, thedramatic nature of price moves owe a lot to Chinese fund behaviour. In thisnote, we look at the available position data from the SHFE to try to ascertaintheir movements on copper, zinc and aluminium. While certain positions weresquared before the Chinese New Year, we notice that the core SHFE shortsand LME longs still remain ahead of what should be an improved sequentialdemand environment post the holiday. Meanwhile, for zinc and aluminium, adivergence in SHFE position movements highlights very different stories.

    Latest news.

    After a noteworthy 4kt draw in LME inventories, copper was the LMEoutperformer on Tuesday, rising 2% to $5,800/t. All other base metals alsomoved higher. Meanwhile, gold dropped 1% to back below $1,200/oz.

    Central banks were on the buy side of the gold market again in January, IMFdata out on Tuesday suggests, but by the extremely modest amount of 3t.

    Russia’s reserves fell by 0.5t, which is in line with our expectation that Russia’sgold buying spree, which saw it add 173t in 2014, would slow this year. Onlythree central banks added more than 1t, Kazakhstan, 1.7t, Mauritius, 1t, and theEuropean Central Bank, which saw an increase of 1.6t when Lithuania joinedthe single currency on 1 January. Normally these inflows are offset by areduction at the national central bank level when the gold is transferred, butLithuania bought 1.6t to meet its commitments. No central bank sold more than1t, with Belarus, at just under 1t, the only seller of note.

    Janet Yellen, the Fed chief, gave her semiannual monetary policy report tothe US Senate on Tuesday. She reiterated that the FOMC was going to be‘patient’ in raising interest rates, explaining again that this meant it wasunlikely that there would be a increase in the bank’s key interest rate for atleast two meetings. But she also outlined what would happen next if economicconditions ‘continued to improve’, which is that the FOMC would beginconsidering rate moves on a ‘meeting-by-meeting’ basis. This, she stressed,did not ‘necessarily’ mean the Fed would hike interest rates within twomeetings, but simply that it might ‘soon’. In short the Fed continues to preparethe ground for its first rate hike since 2006 but wants to maintain its flexibility.

    The dollar at first rallied then fell back, gold did the opposite, by the end ofher testimony they were both back where they started.

    In their H1 fiscal year results presentation, BHP Billiton’s average iron orecost was $20.35/t, which suggests that with moves in FX current cost levelsare set to be below $18/t. This highlights again the drop in the cost curveseen from a combination of FX, diesel costs and, importantly, ongoingproducer self-help.

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