Can't cop it any more

Guambat has railed at the changes experienced in the various world markets with the invention of new "financial products" and the unleashing of the large funds and brokers to pursue them any where, any time, and any way, without (much) regulation or oversight (see, for instance, Risque business).

Now its the turn of the copper users industry to have a go.

Copper users attack funds' feeding frenzy

COPPER users have threatened to turn their backs on the London Metal Exchange, alleging hedge funds are driving copper prices to speculative extremes that no longer reflect supply and demand.

In a letter to the LME and the Financial Services Authority, the International Wrought Copper Council said that its members faced severe difficulties financing deliveries. [If you want to get an idea of the members facing those severe difficulties, see this link. A related association, the International Copper Study Group, has much more data on the industry.]

"This market, where speculators can buy what does not exist, is doing serious damage to our industry and will bring into question whether the LME copper price should continue to be the recognised reference price," it said.

Copper has surged by 60 per cent this year, touching $US7385 a tonne. It was just $US1400 four years ago. Now, it's $US7220. "We've never had a spike of such magnitude before," the IWCC's chairman, Simon Payton, said.

"This is a feeding frenzy driven by hedge fund speculation. This would not be happening if the price was left purely to industrial supply and demand. The market may be tight, but it is well-balanced.

"You have to take it with a pinch of salt when the LME claims it is managing this market on the basis of industrial demand," Mr Payton said. "I'm not sure their methods can detect whether wolf-pack speculators are manipulating the futures markets three months out."

The LME is a famously raucous market where traders bark orders for each metal in five-minute sessions of open outcry inside a ring of red leather seats.

Over 95 per cent of all base metals trading worldwide is conducted in the ring, or through an electronic subsidiary, with an turnover of $US3 trillion ($3.96 trillion) a year.

Shanghai is now emerging as an alternative exchange for copper, but on a much smaller scale.

An LME spokesman insisted that the market was running in an "orderly" fashion. The exchange last intervened in the copper market in 1996 after a rogue trader from the Japanese bank Sumitomo lost $US2.6 billion.

David Threlkeld, a veteran copper trader who exposed the scandal, said he feared the speculative fever was even worse this time, blaming it on a group of New York and London funds.

"This is a perfect storm. If oil takes a dive, there are going to be a chain of margin calls going through the copper market, and then we'll find there are no buyers," he said. "Copper will implode overnight. This is like flipping condos in Miami, the last one holds the bag."

Follow-up: I posted this this morning about 8am. About 4:30pm today, there was this from a Reuters commodity report:

SINGAPORE, May 3 (Reuters) - Copper prices edged up on Wednesday towards their recent record high on concerns over tight supply and speculative buying, but trade was subdued due to holidays in two major Asian economies -- China and Japan.
By 0602 GMT, London Metal Exchange copper for delivery in three months was at $7,145/$7,195 a tonne, against Tuesday's London close of $7,130.

"Although the trends are still overall heading higher and the bulls have been dominant since last July, the market seems to be showing some nervousness," William Adams, metals analyst with BaseMetals.com, said in a daily note.

"Is it worried by the threat of higher exchange margins, or the fact that the International Copper Study Group forecasts a supply surplus of 240,000 tonnes this year, or perhaps by the realisation that demand is being hit by substitution?"

Investment advisers at CalPERS could firm up by August a plan for America's biggest pension fund to allocate its first $1 billion in commodities, a fund official said. [ID:nN02542604]

On the supply side, talks to end a drawn out strike at Grupo Mexico's giant La Caridad copper mine are not an option as long as strikers insist the company negotiate with an ousted union boss, a spokesman said on Tuesday.[ID:nN02298052]

And a day after Bolivia's president said the nationalisation of the energy sector was "just the start", the country's vice president said on Tuesday the state wanted more control of the mining industry.[ID:nN02280063]

And some Dow Jones Newswires reports:

Using basic supply and demand fundamentals to forecast commodities prices is still the norm to a large extent, but the spectacular price rallies of the past year beg the question of just how relevant fundamentals have become given the enormous amount of fund money flooding the markets, say Edwar Meir and Fred Demler of Man Financial.

With a renewed surge in fund activity and ongoing supply disruptions, the copper market is set for a further upward leg in the current bull market, said analysts at Natexis Commodity Markets Ltd. in a recent report.

Standard Bank has made significant increases to its 2006 base metal price forecasts, after underestimating investor flows and fundamentals. [Curiously, its increased forecasts are still under the current prices.]

And finally, this anecdote to add to others answering the question "When does a commodity boom become a dot.commodity boom?" in an article in today's Australian Financial Review titled, "Hudson deserts cat litter to mine gold". It was there reported that Hudson Resources was abandoning its attapulgite mining business (which is a clay used to soak up industrial spills and cat poo and pee) to buy Australian Gold Investments for $19.7 million. It's stock dutifully rose 50% on the day.