Zafiro Capital

Zafiro Capital specialises in commodities investment. Stephen Smethurst, CEO and CIO, talks us through the firm and its investment strategy.

“In Geneva we start with top down bottom up research on the main commodity markets” Smethurst explains. “The analysts and myself, using the best research available and our own supply demand models, develop trade ideas. We consider which commodity markets are set for deficits or oversupply for the year/s ahead and work to take advantage of this information. We also employ CTA and systematic models so we are aware of how the CTA systematic funds are likely to act. While monitoring technical and momentum triggers we also closely watch the general macro environment.”

His partner in the business is Tony Simmonds, Zafiro Capital Sarl’s CFO and COO. From the London office Tony oversees supplier relationships, finance and operational matters.

“Our strategy is to concentrate on investing and trading in exchange traded commodity futures, along with a smaller involvement in exchange traded options on commodity futures” reveals Stephen Smethurst. “The use of options may often be employed to protect the portfolio from the possibility of exogenous economic, geopolitical and weather events, while it can also be used to take advantage of the potential for incalculable volatility events during times of political or seasonal-weather related uncertainty.”

Smethurst anticipates that the majority of their risk (around 70%) will be in energy, and the remaining 30% will be split between base and precious metals, and agricultural commodities. However, they may make use of diversified strategies if the appropriate opportunity arises.

Stephen expects the portfolio to display a macro theme from time to time. “It will be specifically designed to contain a heavy weighting of micro-reasoned positions to create diversity and de-correlation from other managers, strategies and the overall macro environment. Directional strategies are initiated to follow the current fundamental trends or are designed to take advantage of a perceived long-term change in a particular market” he adds.

“Research is fundamental to the Investment Manager in identifying the right trades to make, and to that end we use the best external data and research, provided by a multitude of industry leaders such as Bloomberg, Reuters, GFMS, Energy Aspects and Lanworth” says Smethurst. We have rigorously sought after and sourced the best third party providers in the industry to act as our custodian, prime brokers, auditors, legal counsels and administrator. With these, we hope to deliver high quality, efficient and transparent investment services to our investors” he continues.

Zafiro Capital Sarl’s Investment Manager’s extensive experience in commodities markets provides the organisation not only with invaluable knowledge and understanding of the target market areas, “but also a ready-made network of contacts in the industry throughout the globe” reveals Smethurst. “Our extensive network within the commodity sector gives us excellent insight to market intelligence, sourcing trade ideas and macro views” he adds.

Giving an overview of the global commodities market currently, Smethurst believes that China has been the main driver of commodity prices over the past 10 years. “It is clear that the China economy for the past 2-3 years has been cooling as they move from an industrial led economy to a consumer led economy” Smethurst reveals. “But even so growth of 6-7% is still impressive compared to the Eurozone. This sharp recent decline in growth has led to dramatic declines in the prices of iron ore, oil, coal and base metals” he adds.

“However, other commodities like gasoline are showing 15% year on year demand growth in China as the sale of cars continues its relentless pace (up 24% y/y). This has led to gasoline substantially outperforming crude.”

“Crude oil remains fundamentally oversupplied (in 2015 by almost 2mnbpd) and with Iran likely to come back next year at first the outlook is incredibly bleak. However, this has to be balanced against Saudi production slowing as they fail to find buyers for their oil with storage almost full. This coupled with natural field declines of around 5-7% per year and US production falling by 300kbd from mid-June (this figure is likely to increase to 700-800kbd in 2016) may mean that we see significant petroleum stock draws as soon as 2017. However, these shortages may occur sooner if the proposed deal between Saudi Arabia and non-OPEC to stabilize the price of oil progresses. At the current rate we expect the market to be oversupplied by 500k-1mn bpd next year without Saudi/OPEC/non-OPEC action.”

“Obviously the move to a low carbon economy is a big risk to recovering oil prices but the economies in the emerging markets are still growing strongly especially in countries like India, Indonesia, Vietnam and even China. One thing that is clear is if prices do rally we will see a supply response from the USA so it will be a massive challenge to see $100 oil again for the medium term. Most of the largest oil producers we follow closely are bunkering down for a prolonged period of low prices sub $60 dollars. While we agree with that short term, Saudi/OPEC/non-OPEC could combine to immediately tighten the supply demand balance and cause a big shock.”

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