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 The benchmark FTSE 350 mining index, which tracks the performance of
the UK's 11 biggest listed miners, is up 26 percent this year, the
biggest quarterly gain since September 2009, and marking a revival
after three years of losses.
Sentiment in the sector has been helped by a weaker U.S. currency,
which makes dollar-denominated commodities cheaper for non-U.S.
consumers and expectations that top consumer China will use further
stimulus to boost its flagging economic growth.
As a result prices of commodities such as copper, used widely in
power and construction, have risen 7 percent this year, while iron
ore is up 29 percent.
Equity investors have jumped on the bandwagon and miners such as
Anglo American and Glencore have recovered from last year's losses
of more than 70 percent. Both are up around 80 percent so far this
year.
Data from the Financial Conduct Authority (FCA) shows funds' net
short positions in Anglo American are now at 4.5 percent from a
record high of 5.7 percent on Feb. 9, Glencore's dropped to 2.5
percent from 5.6 percent in January and Rio Tinto's hit the lowest
since August 2015 at 0.7 percent.
Short positions, essentially bets on lower prices, aimed to profit
from slowing economic and demand growth in China.
However, fund managers doubt the rally can be sustained as demand in
China, which accounts for nearly half of global use of most
industrial metals, remains weak and surpluses are weighing on the
market.
"It is difficult to see where you are going to get real demand
growth in China," said Malcolm McPartlin, UK equities investment
manager at Kames Capital.
"Only better supply and demand dynamics across markets like iron ore
and copper and also confidence in Chinese demand would change our
underweight position in the mining shares sector."
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China, aiming to shift its economy away from manufacturing towards
consumption, has been behind the recent rout in metals prices, which
saw copper fall to 6-1/2 year lows of $4,318 in January.
It is also one of the main reasons why mining majors such as BHP
Billiton, Rio, Glencore and Anglo American have had to take tough
decisions to slash capital expenditure, dividends and sell assets.
According to data provider Preqin, 62 percent of institutional
investors said that natural resources funds had not met their
performance expectations over the past year and 41 percent plan to
allocate less capital to the sector in 2016.
THS Partners fund manager Ali Miremadi said nothing has changed
fundamentally. THS, which has a 5-10 year view, holds an underweight
position in the mining sector.
"To go further from here one will want to see fundamental recovery
and realistically these are very long cycles," he said, adding that
the cycle will be dictated by the pace at which miners cut output to
offset weak demand growth from China.
(Editing by Pratima Desai and Keith Weir)
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