Who would bet against commodities now that a rebound in raw material prices has restored the industry to rude health and profitability?

Some Mayfair-based hedge fund managers have been willing to take on a version of that trade. They invest in corporate credit for a living and advocate a particular form of negative bet: selling “short” the debt of commodity trading companies such as Glencore or Trafigura.

The reason isn’t a view about prices for copper, oil and coal, or insight into the direction of the Chinese economy, although it is not hard to find long-term sceptics on either.

Instead, the trade can be thought of more as a form of insurance, designed to pay out if there is a repeat of last year’s market turmoil, which temporarily closed access to the debt markets for many companies.

The pay-off would come from faltering confidence among banks and investors in the ability of commodity trading companies to refinance debts.

Trading businesses operate much like banks, financing the activity of mines, but without the costs and capital ratios of regulated lenders. In the market turmoil of a year ago, many bonds traded below 80 cents on the dollar.

For Glencore, which has about $9bn of debt coming due in the next three years, some investors debate the worth of inventories on the asset side of the balance sheet if liquidated in a hurry. Privately owned Trafigura has no public shareholders to turn to for support.

Both can argue that fears have been put to rest, with banks supportive with credit lines. Glencore is cutting debt, while Trafigura boasts a balanced trading book where positions are hedged with offsetting trades.

Bond prices have rebounded to trade above par values. In the face of such stability, the shorters’ trades reflect in part a search for something to do when credit markets are becalmed.

Still, bond prices should not get too much higher — limiting future losses and keeping a lid on the price of shorting the stock at about 3.5 per cent a year for Trafigura debt maturing in 2020 and below 3 per cent for Glencore, plus around another 1 per cent to finance the position.

After all, the time to buy flood insurance is when the mud is cracked, the skies are clear and the river has fallen to a trickle.

dan.mccrum@ft.com



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