Hedge Fund Caught Copper Handed

Submitted by Wall St. Daily as part of our contributors program

Hedge Fund Caught Copper Handed

By Tim Maverick, Staff Writer

 

In a plot right out of a spy movie, one large hedge fund devised a plot to take control of an enormous amount of copper.

The firm in question is London-based Red Kite, a $2.3-billion, metals-focused hedge fund founded in 2004 by Michael Farmer and David Lilley.

The copper community recently discovered that Red Kite is well on its way to cornering the copper inventories market.

In fact, Red Kite currently controlled as much as 87% of the copper held at the London Metal Exchange!

So what’s behind Red Kite’s bold maneuver? And how can investors profit from it?

Red Kite’s Strategy

The answer to the first question is obvious. Red Kite is preparing for slacking copper supplies in the next two years.

As low prices are making some copper mines unable to continue production, a dip in supply is likely. And copper prices are down more than 7% this year due to excess supply.

Red Kite controls about 140,000 metric tons (mt) or $850-million worth of copper.

Low inventories – which were drawn down about 55% this year to only 161,000 mt – helped to make this acquisition possible. In fact, this is the lowest level since 2012.

Red Kite is also inadvertently aided by China’s stockpiling agency, the States Reserves Bureau.

You see, China alone accounts for 40% of global copper consumption. The country has already bought roughly 350,000 mt of copper this year, and is taking delivery of more metals in order to take advantage of the cheapest prices since 2008 (in renminbi terms).

More delivery of physical copper to China means less copper is circulating around the world.

That plays right into the hands of Red Kite because when you control most of the copper in inventory… you can push prices higher.

Joining Forces

If Red Kite is patient, it seems everything will go according to their plan.

The long-term supply fundamentals for copper are positive. One key fact in that prediction is that it takes between 10 and 20 years to bring a major copper mine online.

Rio Tinto PLC (RIO) says that within the next decade, the market will need an additional 4 million mt of new production capacity. That’s an exceptional statement, considering that the world’s biggest copper mine, the Escondida mine in Chile, produces one million mt annually.

To join with Red Kite and profit, investors could buy the big copper producers, such as Freeport-McMoran (FCX).

A better choice may be to buy an exchange-traded fund that holds copper futures contracts. One such fund is the United States Copper ETF (CPER). It holds three differently dated futures contracts, traded on the Chicago Mercantile Exchange that’ll track copper’s price movement.

Buying CPER means that if Red Kite is right… you will be too.

And “the chase” continues,

Tim Maverick

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By Tim Maverick