INTERVIEW: London’s newest metals fund expects higher prices after fight to trade the trade war

Major swings in the prices of both nickel and tin over the past month could presage similar moves across the base metals complex, reflecting the waning influence of the US-China trade war on the metals markets.

That is the opinion of Commodities World Capital (CWC), a specialist base metals-only trading fund that was launched in October 2018 under the management of veteran investors Luke Sadrian and Thomas Hodge.

Volatility in base metals prices - in particular the complex leader, copper - is at multi-year lows. This is largely due to unwillingness among investors to take positions that value China-centric commodities in the wake of the country’s running trade dispute with the United States.

For funds such as CWC, which thrive on big moves in prices, this provides a difficult trading environment. But there was a 7% one-day drop in the price of tin on the London Metal Exchange on July 1 and a rise in the price of nickel that resulted in a 41% year-on-year surge suggest this is coming to an end.

“The trade war isn’t the big negative that it was a month ago, or certainly two months ago,” CWC chief executive officer Kevin Connors told Fastmarkets in an interview at the company’s London office on Monday July 22.

CWC foresees a scenario in which the US administration could agree to some kind of deal with China, with the intention of boosting the likelihood of success for President Donald Trump in his bid for re-election in the 2020 US presidential elections. But even now, base metal prices are starting to move in a more idiosyncratic fashion, the fund said.

“The market is becoming numb to the trade war as an issue, with respect to base metals, so other topics can [command more attention],” Connors said.

Diminished volumes
Nowhere has the market’s diminished volatility been more evident than in the price of copper. The LME’s flagship three-month contract had two substantial open-to-close moves this year - a 2.8% gain on January 4 and a 3% drop on May 1.

“To be brutally honest, for me, the past four-five months has sucked because everything’s been stuck in a range,” Sadrian, who is CWC’s joint chief investment officer, said.

“Over the 45 days from the beginning of June to the middle of July, despite the fact that front-month implied volatility was 16% or 17% in copper, 90% of the copper traded in a 2.25% or 2.5% range,” he added.

CWC manages just under $30 million of investments, split between several managed accounts with different mandates. The company said in an emailed statement that its performance was “very small down” for the year-to-date on July 1, but declined to go into further detail.

Slim returns and the rise of algorithmic trading models have been factors behind the closures of commodity funds in recent years. Trafigura closed its Glanena Metals Fund in 2016 while last year Red Kite closed its Tamarisk fund.

The flip-side was that smaller market participants such as CWC and Arion Investment Management have set up business in London, looking to benefit from price moves if and when they happen.

Institutional and high-net-worth individual investors remained cautious about dipping their toes into commodities, even with high-value equities such as US tech trading at 20 times earnings multiples.

“The people that we’ve had invest in us, who are looking to get out and do things, are people who know the space,” Sadrian said. “From the allocators’ standpoint, I don’t think there’s any huge look at rotation in.”

Nickel bullish signal
This could all be about to change, CWC executives said, with nickel’s recent jump in price being a case in point.

The LME three-month nickel price soared to a one-year high of $15,115 per tonne on July 18, up by 18% since the start of the month.

CWC has a bullish medium-term outlook for the metal, based on projections of future demand for electric vehicles (EVs) and the nickel-intensive batteries to power them.

“The question is: are people starting to feel short nickel now? The answer is ‘yes’ based on questions but not based on activity,” Connors said.

The EV story, with nickel miners such as Vale expecting five-fold growth in nickel usage for batteries by 2025, is attracting attention from investors seeking high yields.

“In commodities, it seems that things need to have a special theme for people to get excited. Nickel just might be the beginning of a series of themes for base metals,” Connors said.

Shift to copper
There are signs that this heightened volatility might spread to copper. A major move for the red metal would be fundamental in attracting capital inflows to base metals from the wider investor pool.

“Nickel is like a canary in a coalmine,” Sadrian said. “But what would change the view of the space is for the flagship base metal to become more volatile. Base metals is ‘Dr Copper’ to 90% of the people out there [in the market].”

Three-month copper traded in a intraday range of 3% on July 19, with market shorts covering their positions amid a rise across the commodities complex that was driven by an upturn in the price of oil.

“Copper still could be in the initial stages of something like [what has been seen in] nickel,” Sadrian said. “It seems that it’s about to come alive now, with volatility picking up. That’s why I think it’s exciting.”

Any inflow of investor cash into metals funds would reverse the drought of capital allocation over the past 10 years. But CWC is positive about the near-term outlook.

“I firmly believe that will happen again,” Sadrian said. “It’s just a matter of when.”

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