By Neil Behrmann
October 2005:- The UK Financial Services Authority is investigating several London Metal Exchange firms following complaints that a group of speculators have been manipulating the copper market.
The FSA doesn’t comment on investigations, so names haven’t been disclosed. But copper dealers and a fund manager say that the FSA is examining records of four firms. Furious copper fabricators and other consumers have protested that copper prices would never have reached $4,000 a metric ton last week, had the mystery buyers not rigged the market, dealers say.
Rumours are flying around the market, but the usual suspects, notably a large hedge fund or a small group of funds and traders have built up an extensive position in copper. Other funds and speculators have followed the upward momentum and have driven up the price of copper to record heights. From its lows of $3021 a ton earlier this year, cash prices of copper surged by 33 per cent to $4005 last Thursday, before closing at $3910 a ton on Friday. This compares with prices of $1321 a ton in October 2001. Until mid year there were fundamental reasons for rising copper prices since demand from China, the rest of Asia, the US and Europe outpaced demand. But in recent months copper consumption began to slacken, while the International Copper Study Group is estimating that production will rise during coming months. Meanwhile factories are substituting aluminium and other metals for copper, since their prices are much cheaper.
Copper dealers contend that the speculators have purchased huge quantities of copper and are shipping and stockpiling the metal in China, Chile and other parts of the world. They are thus creating the allusion of a shortage when in fact, copper supplies are fast rising in the face of a decline in demand, says David Threlkeld, head of Resolved Inc. a US metals firm. Such is the squeeze in the market that cash prices copper are trading at a premium of $145 a ton over three months copper futures and compares with prices of around $3350 a ton in September 2006 and $2950 in September 2007. In normal circumstances, cash quotes should be at a discount to futures prices because of finance, shipping and insurance costs.
The ploy is very similar to the tactics of Sumitomo trader Yasuo Hamanake who pushed up copper prices in the mid nineties by purchasing and holding stocks in China, Mr Threlkeld believes. Copper producers hedge future production by selling copper derivatives short on the LME and New York’s Comex. The aim is to insure themselves against a decline in prices. When the copper is delivered the consumer pays the cash price. A few months ago producers hedged on the futures and options market at prices of around $2,500 a ton, according to dealers and have had to meet expensive margin calls on their loss making derivative contracts. Speculators who also sold short have incurred losses and have been desperate to close their positions by buying copper. This has played into the hands of the large speculators who are taking profits and selling their copper to frantic buyers. Moreover, according to copper dealers consumers are resisting the higher quotes, leaving the producers with a loss. Mr Threlkeld and several dealers and analysts fear that there could be a double whammy. Several producers and consumers have lost on the way up but since the funds have built up such a large position there will be a downward price spiral at some juncture, causing huge losses on the exchange.
Hamanake was jailed for fraud after the copper price crashed in 1996. Although there is no evidence of fraud, the LME should have the experience not to allow a corner to take place, according to Mr Threlkeld. Speculators shouldn’t be holding genuine producers and consumers to ransom, he maintains.
In a statement to Reuters, Diarmuld O'Hegarty, LME director regulation and compliance said that "investment funds were a major market factor”. “But the LME has enough tools to ensure that the market remains orderly.” The market was moving back towards equilibrium, but that it was difficult to gauge when falling demand and rising supply would register in the market, he said.
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