Hedge funds go long on commodities

Metals, silver prices sharply rebound after easing concerns on China's growth

The financial year starting April 1 has been good so far for commodity market players, with hedge funds turning bullish and going long on most base metals, crude oil and bullion.

Easing concerns on China’s growth as reflected in the recent data, weakening of the dollar index and overall positive sentiment have helped bulls get an upper hand.

Bloomberg Commodity Index headed for a five-month high, spurred by gains from metals to soy beans, and weighing on government bonds.

Iron ore and steel prices are rising, following demand from the construction complex, where steel reinforcement bars jumped to a 19-month high in Shanghai, buoyed by an improving Chinese property market, supporting the Australian dollar. Rebar futures jumped for a fourth straight day on the Shanghai Futures Exchange, advancing as much as 7.5 per cent to 2,787 yuan ($430) a tonne. The product that’s used to strengthen concrete is 19 per cent higher this week. Iron ore futures in Dalian rose to the highest since March 2015 on Thursday.

Silver has been a star performer and gold has remained firm. The metals segment did well, raising hope of revival in silver’s industrial demand, 55-60 per cent of the white metal’s total demand. Silver prices this month are up 12.6 per cent and trading at a fresh 11-month high of $17.35 an ounce, while gold is up 2.1 per cent this month, trading at $1,259 an oz.

Base metals are not behind. The index on the London Metal Exchange (LME) is up 4.5 per cent this month, led by nickel, zinc and aluminium, up 11.3, 7.5 and 7.1 per cent, respectively. Last week, copper rose to a four-week high, boosted by rising expectation of improving demand growth from China, after a string of stronger economic data from this top consumer. On Thursday, benchmark copper on the LME traded at $5,008 a tonne, up eight per cent since the start of last week.

Crude oil, rising till last week on hope of an output freeze decision at last Sunday's meeting of the exporting nations' cartel, Opec, has seen a 11-month high of $44-45 a barrel for Brent crude. The market now believes price equilibrium is on the cards. Seasonal demand is also supporting the prices.

Gnanasekar Thiagarajan, Director, Commtrendz Research, said: “Hedge funds globally have built long positions, testing the nerves of bears. China’s better than expected manufacturing and export data, weakening of the dollar index and efforts by Chinese authorities to prop demand by cutting rates and reserve ratios seem to be working.”

While easing of China concerns and general perception that the US rate rise might not be so soon has boosted sentiment, crude oil might find it difficult to sustain a rally. Morgan Stanley analyst Adam Longson said, “Higher prices could attract more producer hedging from independent companies and large oil producing sovereigns.” This could cap the price; emerging markets that have built big storages might not buy at higher prices and even refineries, too.

Silver has been a sharp performer, with domestic prices rising above  Rs 41,000 a kg a 19-month high on Thursday, closing at Rs 41,135 a kg in the Mumbai spot market. Gold closed at Rs 28,550 per 10g. Steel and iron ore prices are also up this month, by 31 per cent and 20 per cent, respectively.