Friday, December 20 16:02:25
Someone has made a near billion-dollar bet on copper this week, virtually cornering the world's key stocks of the metal.
That has stoked worries of a supply squeeze, as warehouses run low on a raw material vital to global industry, and has raised questions about commodity exchanges' efforts to curb attempts to manipulate prices by aggressively heavy trading.
The London Metal Exchange does not identify investors holding positions but data <0#LME-WHT> on Friday showed that a single participant was holding 50-80 percent of available copper stocks on the LME, which handles the bulk of trade in the metal. The position was nominally worth up to $753 million.
Earlier in the week, one investor - presumably the same - had held over 90 percent of short-term trading instruments <0#LME-WHC> on LME copper - a position worth at least $862 million on paper. Traders have no clear idea who is behind it.
The firm doing the buying would not have had to put up all the cash up front and may well have had hedging positions and real requirements for physical copper. But it appears nonetheless to be a substantial gamble on prices rising.
And since the very fact of building up such a dominant position fuels fears of scarcity, it was little surprise that prices did in fact increase - LME cash copper gained 5 percent through December as the long position grew, hitting a four-month high on Monday before shedding about 1 percent.
That link between an aggressive, large buyer and fears of supply shortages driving prices higher is one that exchanges, including the LME, have historically tried to contain.
But the LME, under scrutiny from government regulators, said it has no plans to cap the size of investors' positions - though it does have other mechanisms to thwart manipulation.
"The LME has a robust position management system in place to deal with dominant positions," said spokeswoman Miriam Heywood, adding there was no plan to change those rules.
The world's oldest metals marketplace has already been overhauling practices on warehousing - its system of ensuring physical stocks exist to back trades concluded on the exchange.
It has done so in response to allegations of manipulation in its larger aluminium market, which industrialists say has distorted global supply and inflated prices.
With its copper stocks shrinking, the impact of any future squeeze could be more severe than what happened this week, said analysts, who noted a 19-month high in the key price spread between copper for immediate delivery and that for future delivery - a measure of fears that ready supply may run short.
"The tightness is there. It's bubbling underneath," said Wiktor Bielski, head of commodities research at VTB Capital.
"There are just a lot of things that could all of sudden turn quite nasty for anybody who needs spot copper and doesn't have any cover."
The low stocks combined with an outage at a smelter in the Philippines, Chinese demand that has been running more strongly than expected and concern about Indonesia's plans to boost its own industry by banning the export of unprocessed ore could all contribute to a volatile mix.
Among those potentially hardest hit by a spike in prices are the numerous speculators who have taken short positions on the LME - selling copper for future delivery in the hope of buying it more cheaply later, before the contracts fall due. (Reuters)