China to LME: Come and get me,
copper! By David M Lenard
HUA HIN, Thailand - Copper prices on the
London Metal Exchange (LME) continued to test new
highs of US$4,580 per ton for three-month advance
delivery on November 18, amid continuing
uncertainty over whether China's State Reserve
Bureau (SRB) held enough copper to deliver on
trades made by disgraced "rogue trader" Liu
Qibing.
Although copper prices on China's
Shanghai-based domestic commodities market slid
$36 per ton on November 17, following a recent
sale of 20,000 tons of the metal by the SRB,
Chinese traders predicted the relief would be
short-lived. "The price drop is
temporary, and set to bounce
back in the coming days," said Lei Hongwei, a
trader with Beijing CIFCO, a subsidiary of China
International Futures Co Ltd. "As long as the
copper price is ... at a high level in the
international market, the domestic price is
unlikely to drop."
Liu, a trader in London with the
SRB, disappeared in October after building gigantic
short positions in the metal, said to range from
100,000 to 600,000 tons.
A recent spate
of stories in Chinese media outlets predicting
an imminent fall in copper prices - for example,
a November 17 Xinhua story describing the need to
"cool down the overheated investment in the copper
industry" - suggest an attempt is ongoing to talk
down prices. But prices continued to remain near
historic highs amid rampant speculation that China
would have to make large purchases on the open
market to fulfill Liu's contracts in December.
Mark Topfer, a former lawyer at the LME,
predicted that China would default on the trades
because it lacked the metal to make good the
commitments of the fallen copper trader. In a
Bloomberg story, Topfer depicted China's
obligations for copper deliveries into
LME-approved warehouses as "infinitely higher than
the stock that exists". Topfer was the London
exchange's deputy general counsel until last year,
and advises LME brokers and customers.
A
China Daily story on November 17, citing an
unnamed official, acknowledged that as much as
200,000 metric tons of copper would have to be
delivered to fulfill the positions amassed by Liu.
According to Bloomberg, total inventories
worldwide at warehouses monitored by New York's
Comex Exchange, the LME and the Shanghai Futures
Exchange amount to 140,374 metric tons. Adding to
the perception of a supply crunch are recent
reports by copper industry analysts showing a fall
in mining output. For example, the most recent
study of the International Copper Study Group
revised total copper mine output for this year
downward by 695,000 tons compared to its March
forecast. The downgrade was largely due to
production disruptions in Chile and the US.
Refined metal output was revised even lower, by
831,000 tons, as were production forecasts for
2006. Some analysts wondered whether even these
forecasts were still too optimistic.
At
the same time, the markets were paying close
attention to the weekly Shanghai Futures Exchange
copper inventory data, due to be released late on
November 18. The key question is whether the
bureau could make good on a promise to cool copper
prices by delivering up to 500,000 tons of its
claimed 1.3 million ton copper stock.
One
trader said: "That could certainly take some of
the steam out [of copper prices], that's a lot of
copper." It should be noted that China itself is a
major copper producer, with large deposits in Yunnan, Qinghai, and Sichuan provinces.
Reserve sales: a dangerous
game? Meanwhile, the SRB continued with its
stated plans to sell stockpiled copper, pledging
to sell another 20,000 tons on November 23. These
sales could be interpreted in two totally
different ways, depending on whether China
actually possesses the 1.3 million tons of copper
that it says it does. "The key is whether the
state can really deliver on [Liu's] 200,000 ton
position in London,'' said Yuan Fang, a trader at
Shanghai Dongya Futures Co, in a telephone
interview with Bloomberg.
If China
actually does have that amount of copper, the
sales would become an extremely clever attempt to
milk the maximum possible cash benefit out of the
Liu affair, by selling some of China's copper
stockpile into a market now at its peak.
Presumably, China could even sell enough to force
down copper prices sufficiently far to make good
on Liu's bet on December 21, the date his
contracts are said to be due; if that happens,
expect to see Liu himself emerging from his
rumored Shanghai seclusion around Christmas,
smelling like the proverbial rose.
On the
other hand, if China doesn't have the metal, as
many market observers suspect, it is playing a
very dangerous game by selling down its stocks
now, since it could be forced to buy back the same
metal later - at even higher prices - to fulfill
Liu's contracts. Since this step would obviously
compound the losses, the suspicion of many that
China has no intention of fulfilling the contracts
has been heightened.
Retracing Liu's
trail Additional information emerging about
Liu's transaction activity before he disappeared
in early October has led some to suggest that the
SRB saw the disaster looming weeks ago, and took
action then in an attempt to minimize its losses.
The South China Morning Post reported that
Liu's short positions in copper amounted to about
130,000 tons (which would be considerably lower
than the high-end figures of 200,000 or even
600,000 that have been reported). These purchases
were made at about $3,300 a ton in the
expectations that the price would decline. The
week after Liu disappeared, according to the SCMP
source, the SRB "... recovered about 50,000 tons
of short positions on the London Metal Exchange,
which pushed prices up to about $3,800 a ton". The
same source described Liu as a "scapegoat" and
said that "he was only acting according to bureau
regulations and procedures".
Behind
closed doors in Beijing As of November 18,
the government continued to distance itself from
Liu's activities. A China Daily story on Friday
acknowledged Liu's status as a senior figure at
the SRB and confirmed that he had built a "massive
short position" on the LME. But it also said an
official investigation had concluded he was acting
on his own and denied government responsibility.
"An initial investigation found that Liu alone
should be blamed for the loss," the newspaper
said, quoting an unidentified SRB official. "As
far as I know, the loss was a result of his
personal actions, instead of the government's."
"If brokers have papers that are signed by
Liu, the bureau won't obligate the positions
because the bureau did not sign them," a senior
official for a state-owned metal group was quoted
as saying in an Independent article. That official
added that brokers who had concluded contracts
with Liu needed to hold an authorization letter
from the bureau certifying that Liu represented
the bureau to open short positions on the
exchange. "If they have that, they can go to ask
the government for money," he said.
A
Bloomberg report that the SRB was not returning
phone calls on Friday added to the sense of
intrigue and suggested to some that high-level
consultations were ongoing in Beijing to decide
official policy on the case. One prevalent rumor
held that the SRB had requested permission from
higher state authorities to export 200,000 tons of
copper; if true, this would suggest that the
government intends to fulfill Liu's obligations in
the end, despite current denials.
Recall
that since the hapless trader's original intention
(by all accounts) was to buy back the metal at a
lower price, actual delivery would never have been
necessary; it is therefore plausible that special
permission would be required now to actually ship
the copper to customers, especially since the
quantities would presumably have to come from
strategic state reserves.
'Kicking
someone when they're down' London sources
generally maintained that China would ultimately
be held liable for Liu's activities and warned
China to expect little sympathy from British
authorities, even if it turns out to be true that
the SRB was misled by the missing trader. The
South China Morning Post quoted Alastair Clayton,
executive chairman of London-listed copper
developer South China Resources, as saying, "The
market's got the bit between its teeth now and
what the Chinese will be realizing is that [the
London market] likes nothing better than kicking
someone when they're down."
And David
Cliffe, a spokesman for the London-based Financial
Services Authority, which regulates the LME, told
a Bloomberg reporter that Liu wasn't personally
authorized to trade on the metal exchange,
implying that he must have acted on China's
behalf.
Other London traders cited by the
Financial Times agreed that the type of
documentation Liu used to persuade brokers to
conduct the trades was crucial. If he did not have
written authorizations from the SRB, the
government could argue it was not responsible for
the trades, they said. Other observers, such as
ex-LME lawyer Topfer, remained highly skeptical
that the SRB could pin the loss-making
transactions on Liu. "The SRB, not Liu, is
responsible for any losses," he maintained,
adding, "My sense is that [the official denials
are] the SRB ducking for cover ... you don't get
this short for this long.''
Shipping
'impossible' Another unresolved issue in
the copper affair is whether it is even physically
possible for China to fulfill the obligations made
by Liu, since, if the reports about the amounts
involved are accurate, this would literally
require shipping more than 100,000 tons of the
metal to London warehouses by December 21.
A Guardian story November 18, citing the
aforementioned reports that the SRB was seeking to
export 200,000 tons, observed that this amount
would be three times more than the amount
currently in LME warehouses and concluded that
"getting [this amount shipped] out of China on
time is regarded as an impossible task".
Initial reports have appeared regarding
the identity of foreign parties said to be exposed
to the Liu trades. Names mentioned include the
Standard Bank of South Africa and Sempra Metals,
both prominent members of the LME. However, both
Standard Bank and Sempra refused to comment.
Barclays, whose exposure has also been rumored,
maintained that its commodity department was
unaware of any involvement in the deals.
Settlement rumors If China does
ultimately refuse to meet Liu's contracts, the
possibility of a negotiated settlement along the
lines of the mid-1980s International Tin Council
case becomes more likely, since the government
would presumably prefer to avoid the protracted
embarrassment and negative publicity that would
result from a court battle in the UK.
The
Taipei Times speculated that the government might
"seek to share the financial pain of the
unauthorized positions" with the brokers in a bid
to settle the dispute. And Topfer predicted that
the LME might use its "special committee" to reach
a settlement between China and the exchange
brokers said to have done business with him, if
the SRB reneges on the positions. However, LME
spokesman Adam Robinson refused to comment.
Happy days for copper
miners Naturally, the most consistent
winners from the two-year runup in copper prices
have been the world's copper miners and brokers.
BHP and Rio Tinto, both large copper miners, saw a
50% and 58% appreciation in their market
valuations the past year as copper prices climbed.
Chinese producers, including Jiangxi Copper Co and
Yunnan Copper Industry Co, have also benefited.
Meanwhile, with copper prices at record
highs, sellers are emerging from the woodwork,
reminiscent of the Hunt brothers' notorious
attempt to corner the silver market in the 1970s,
which resulted in ordinary citizens melting down
silver pitchers and eating utensils in an attempt
to cash in. In mid-October, an African seller
posted comments on www.antaike.com, a site
specializing in the Chinese metals industry:
I am writing to you in order to
establish relationship [sic] between copper
china buyers and copper African suppliers. I
stayed 6 months in Katanga region [Democratic
Republic of Congo] where copper and other high
value minerals are waiting buyers. I can offers
my knowledge and competencies to reach china
needs. Perhaps you could let me know buyer
contacts, and we can scheduled appointment
regards your suitability.
Counting
up the damage The scope of the losses is
still not clear, since it depends on the quantity
of metal that Liu agreed to sell (which is not
known with certainty), multiplied by the
difference between the original selling price and
the market price on December 21, which will not be
known until that day. Any additional quantities of
copper that China purchases between now and
December will also affect the final amount.
However, Wang Zheng, a trader at Shanghai Dalu
Futures Co, said in a telephone interview from
Shanghai November 17 that the losses might go as
high as $300 million, according to a report by
Bloomberg.
The direction of the market is
anyone's guess. But David Threlkeld, president of
Scottsdale, Arizona-based Resolved Inc, who gained
fame in 1991 when he became the first to publicly
allege that Yasuo "Mr Five Percent" Hamanaka was
attempting to corner the world copper market,
speculated that prices might rise another 9% this
year before falling in 2006, assuming China is
forced to make good on the bets of the unfortunate
Liu.
David M Lenard is a
correspondent for Asia Times Online in
Thailand.
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