Tuesday, November 15, 2005

Not enough coppers on the street

It appears the commodities traders have the Chinese State Reserve Bureau on the run over copper. Just like when the Japanese trading house, Sumitomo, tried to corner the market a few years back, when the traders smell weakness in any formidable account, they pack like hyenas and pull them down and eat 'em. Not a pretty sight, but it is one of the rules of the jungle those guys play in. What does it mean for us? In the short term, higher prices for copper and the houses which own or produce it and the products made from it. But a tale this big will implode before much longer, and the speculators driving the prices higher will then drive the prices lower.

"China's state metal-stockpiling bureau declined to comment on a report in The Wall Street Journal Asia that a government copper trader is missing after placing "big" bets on a drop in prices. Liu Qibing, who worked for the State Reserve Bureau, or SRB, built so- called short positions that require delivery of between 100,000 and 200,000 tonnes of copper by December 21, the newspaper said Monday, citing people who have worked with the trader. Bai Jing, a spokesman for the bureau in Beijing, refused to make any comment.

The SRB may be forced to meet requirements by the London Metal Exchange to deliver the metal, the paper said. The bureau may suffer hundreds of millions of dollars in losses, the largest since Sumitomo lost about US$2.6 billion (HK$20.3 billion) in 1996, The Wall Street Journal added. Copper has risen about 30 percent this year, trading at successive records in London.

Rumors of Chinese short positions have been "swirling for some time," said Roy Carson, a trader at Triland Metals, one of the 11 companies that trade on the floor of the LME. "It's far too murky to draw any conclusions."

The bureau is unaware of the short positions and denied Liu is one of its employees, the paper said, citing Wang Huimin, director of its materials management center. Wang was traveling and unavailable for comment, a colleague who declined to be named said Monday. A short position occurs when a trader or investor borrows a security or commodity to sell it, on the expectation that the price will decline and can buy it back later at a cheaper price.

"If Liu's short position is on the order of 150,000 tonnes, it is rather sizeable indeed given that as of Friday there were only approximately 65,000 tonnes of copper on LME inventory," Dennis Gartman, a commodities trader and editor of the Suffolk, Virginia-based Gartman Letter, wrote in a note Monday. "This is, by historic standards, a low level of inventory on the LME. Liu is short several times that sum."
"The normally secretive SRB has staged a campaign over the past two weeks to cool the copper market. It has given interviews to Chinese journalists explaining its role and views on metal markets. Last Friday, it announced that it had 1.3m tonnes of copper. This is about 1m more than market estimates.
Many copper traders do not believe the Chinese authorities have this amount of metal. “If they have 1.3m tonnes, why don’t they deliver it and prove that they have the metal?” said Robin Bahr, base metals analyst at UBS in London. “If they don’t deliver next month, then we could see copper prices going up to $5,000.”
The Chinese are reported to have built up a short position, which means they have already sold the copper at a fixed price and will have to make physical delivery to warehouses of the London Metal Exchange, the world’s largest base metals market.

December 21 will be a key date for the SRB, as the third Wednesday in each month is the date on which traders who took positions in LME more than three months ago have to make or take their delivery. The trades were reported to have been carried out by Liu Qibing, now said to be on leave from the SRB. However, the SRB has said it did not employ a Mr Qibing.

“Qibing was well known in the market, people knew who he was and that he worked for the SRB. For them to say they don’t know who he is is another reason why the market doesn’t believe them when they say they have got the metal,” said Mr Bahr. Ingrid Sternby, base metals analyst at Barclays Capital, said many traders had called the copper market wrongly by going short on the metal this year." http://news.ft.com/cms/s/f462f856-5541-11da-8a74-00000e25118c.html
Also see http://news.ft.com/cms/s/b47fe118-54f6-11da-8a74-00000e25118c.html


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