Friday, March 11, 2011

Copper roundup

To follow up on my previous copper post here is some additional articles:

One trader (suspected to be JP Morgan) held nearly 90% of the outstanding copper on the LME in late 2010
WSJ December 21, 2010

As commodity prices soar to new records, the ability of a few traders to hold huge swaths of the world's stockpiles is coming under scrutiny.
The latest example is in the copper market, where a single trader has reported it owns 80%-90% of the copper sitting in London Metal Exchange warehouses, equal to about half of the world's exchange-registered copper stockpile and worth about $3 billion.

As is implied in the article, having just one party hold such a huge portion of the outstanding asset is just an invitation for manipulation. For some reason the LME states controls are in place to prevent abuse but I'm a bit skeptical.

I am not the first one to comment on China and their bonded warehouses' providing a convenient 'hiding spot' for excess copper. December 21,2010

As Reuters noted, the London/China arbitrage window was after all firmly shut during the period:
The November inflow was a surprise to many market watchers  given that the arbitrage window — buying from the London Metal Exchange and selling to Shanghai — was shut for much of  last month, Beijing Capital Futures analyst Xiao Jing said.
And, as they also noted:
But trade and warehousing sources in China said the London Metal Exchange and Shanghai arbitrage had stayed closed last month and thatshould have prompted importers to store some arrivals of refined copper in bonded warehouses.
Bonded material can be shipped out to the international  market easily or imported into China after the 17 percent  value added tax is paid.

Finally, something I suspected but had no 'proof''.  Chinese traders may be using copper and other base metals as a cheap funding source as well as a currency play.
From March 9,2011
To reiterate: that’s Chinese companies using copper as collateral for financing deals — also known as a somewhat ingenious nationwide inflation hedge (in the event copper prices continue to rise).Let’s just say it’s a bit like living off a loan taken out against your house. The loan won’t be a problem because you believe the price of your house will only go up.
And while that remains your view, there’s no reason not to double up. Buy even morehouses for the sole purpose of transforming cold hard cash — not inflation proof — into an asset which can continue to be monetised via ever depreciating bank loans.
That is, of course, until copper prices stop rising.

It's all fun and games until the party stops and the margin calls start.  Just think about how much chicanery occurred during the US housing boom.  You don't think games like that are being played in China?

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