Copper Rises to a Record on Speculation China May Default
2005-11-18 07:21 (New York)
By Simon Casey and Matthew Craze
Nov. 18 (Bloomberg) -- Copper rose to a record in London on
speculation the Chinese government doesn't have enough of the
metal to make good on failed bets made by one of its traders.
As much as 200,000 metric tons of copper must be delivered
to international warehouses because of positions amassed by Liu
Qibing, a trader for an affiliate of the National Development
and Reform Commission, the state-run China Daily said yesterday,
citing an unidentified official. There are about 140,000 tons of
copper in publicly reported stockpiles worldwide.
``The funds piled in and pushed prices higher,'' said Angus
Macmillan, an analyst in London at Prudential Bache, a member of
the London Metal Exchange. ``It's physically impossible to
deliver that metal anywhere. The government has basically
increased nervousness in a market that was already nervous.''
Copper for delivery in three months on the London Metal
Exchange rose $50, or 1.2 percent, to $4,210 a ton as of 11:21
a.m. local time, heading for a fifth consecutive week of gains.
It earlier reached an all-time high of $4,220 a ton.
Unprecedented statements by China on sales of copper from
its inventories this week have failed to convince investors the
nation can honor Liu's bets. The communist-run country, the
biggest consumer of the metal, will either default on its
commitments or have to cover losses of as much as $300 million,
according to Wang Zheng, a trader at Shanghai Dalu Futures Co.
`Infinitely Higher'
China's obligations for copper deliveries are ``infinitely
higher than the stock that exists'' in exchange-approved
warehouses, said Mark Topfer, the former No. 2 lawyer at the
LME, in an interview yesterday. Topfer, who works in Norton
Rose's financial markets division in London, was the LME's
deputy general counsel until last year and advises brokers and
customers.
The Beijing-based State Reserve Bureau, to which Liu was
affiliated, may be the second Chinese state-owned organization
to get into trouble in a year. In November last year, China
Aviation Oil (Singapore) Corp. sought protection from creditors
after it ran up $555 million of debt from trading oil
derivatives. The company bet prices would fall. They have risen
to records.
The metal's 37 percent rally in the past 12 months also has
echoes of the Sumitomo Corp. scandal, when trader Yasuo Hamanaka
hoarded metal, sending copper up 69 percent in a year. Hamanaka
admitted in 1996 to unauthorized copper trades that lost the
Japanese company $2.6 billion. He was jailed.
Copper inventory of 141,852 tons, equal to about three days
of global usage, is stored in warehouses monitored by the LME
and commodity exchanges in New York and Shanghai, according to
data compiled by Bloomberg.
`Personal Actions'
Liu built up so-called short positions, betting copper
prices would fall, China Daily reported, citing an unnamed
official at government stockpile agency the State Reserve
Bureau.
``As far as I know, the loss was a result of his personal
actions, instead of the government,'' China Daily cited the
official as saying.
The National Control Center for Supplies Reserve, under the
State Reserve Bureau, declined to comment today when contacted
by Bloomberg. No-one answered calls made to Liu's mobile phone.
Liu hasn't been at work since last month, two people at
companies that traded with him told Bloomberg Nov. 15, declining
to be identified. He hasn't answered e-mails or calls to his
cell and landline phones.
`Eight Brokers'
The LME, the world's biggest metals exchange, may employ
its special committee to settle a dispute between China and as
many as eight brokers who have done business with Liu if the
State Reserve Bureau, or SRB, reneges on the positions, Topfer
said.
Adam Robinson, an LME spokesman based in London, declined
to comment yesterday. Calls to the SRB spokesman in Beijing were
not answered today.
By building a short position, a speculator enters a
contract pledging to deliver a commodity by a specific date at a
preset price. The bet is that prices will fall so that delivery
can be made with supplies that are cheaper than when the
contract was sold.
Liu isn't registered with the U.K.'s Financial Services
Authority in London, which regulates the LME, FSA spokesman
David Cliffe said yesterday.
Production Shortfall
Copper has more than doubled in value since 2003, as
production fails to meet demand. The shortfall in output this
year will be 343,000 tons, Standard Bank in London forecast in a
Nov. 1 report.
China has been announcing sales of copper to ease prices.
The SRB plans to sell 20,000 tons on Nov. 23, the National
Development and Reform Commission said Nov. 16. It sold the same
amount on the day of the announcement.
The SRB may be selling copper to roll over some of its
contracts that are scheduled for delivery in December, Wang
said. A rollover is when a position is closed and replaced with
a similar one for a date further ahead.
``The key is whether the state can really deliver on the
200,000-ton position in London,'' said Yuan Fang, a trader at
Shanghai Dongya Futures Co., in a telephone interview yesterday.
Speculation that the SRB may get government approval to
export 200,000 tons of copper to meet the obligations has
circulated in the Shanghai market, the China Daily said today.
The SRB has declined to comment.
Prices for copper may rise another 9 percent this year,
before falling in 2006, as China is forced to make good on the
bets, said David Threlkeld, the first man to publicly allege in
1991 that Hamanaka was cornering the copper market. Threlkeld is
president of Resolved Inc. in Scottsdale, Arizona.
Liu's current whereabouts are unknown. Liu, 40, may be at
home in Shanghai on leave, the Australian Financial Review said,
without citing anyone.
--With reporting by Xiao Yu and Koh Chin-Ling in Beijing, and
Megan Murphy in London. Editor: Carrigan (jnp, slw).
To contact the reporters on this story:
Matthew Craze in London at (44) (20) 7073 3129 or
mcraze@bloomberg.net;
Simon Casey in London at (44) (20) 7673 2631 or
scasey4@bloomberg.net
