Regular readers will recall our feature on “Attempts to Corner Commodity Markets” back in February of 2013 (see here on page 12 – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v13_generic) and our coverage of one “Dr Copper”.
Recent news reports of a large buyer hovering up almost all the physical copper in recent weeks has us wondering – is Dr Copper back?!
It seems that a single trader has been purchasing huge amounts of copper, once more almost cornering the market as copper stocks are running low and the supply of the metal is running materially below expectations. The secrecy that is effectively part of LME regulations has allowed this shrewd operator to lock in seemingly huge profits recently as he has been able to create a market environment that was previously trading in a contango situation (the norm) to one of backwardation (spot prices are higher than future).
In fact, copper spot prices are currently trading at a $30 premium to 3-month prices. Such an event is indeed reminiscent of Dr Coppers aka Yasuo Hamanaka heyday, the man who was in fact able to corner the copper market for the best part of a decade. Is this the return of Yasuo Hamanaka?
Back in the 90’s Hamanaka was head of metals trading at the Japanese firm Sumitomo Corporation and he was able to take advantage of the loose trading restrictions and reporting rules at the LME to control 5% of copper stocks. With the metal being both heavy and illiquid and thus very difficult to transfer from one warehouse to the other, taking delivery of just 5% of physical stock was more than enough for Hamanaka to force shorters of copper to cover their positions as available copper stocks were reduced dramatically. It will come as no surprise that Dr Copper was able to book juicy profits for an entire decade. Unfortunately for him however, it all end badly as supply increases in China combined with other unfavourable developments turned his profits into a heavy loss north of $2 billion. Ouch!
Could it possibly be happening again? Once more it seems that a trader is attempting to benefit from the loose reporting structure at LME to build a strong physical position in copper whilst also simultaneously buying futures contracts and taking delivery. Net effect is to force desperate traders to pay whatever it takes for spot copper in order to honour their short contracts. Perhaps this is what really happened last week when copper futures shot up in seconds (see below) and that was later blamed on a “fat” finger…
Copper intraday chart
Although publicly available information is limited, what we can ascertain is that the squeeze is being orchestrated by just one trader (or an institution/organisation behind him). His positions, as reported last week, amount to 50%-80% of available copper stocks on the LME – a very serious sum indeed. It seems also that his timing is impeccable with many traders and hedge funds short spot copper as they bet on a continuation of a supply glut of copper. Also and in listening to our friends the “anal”ysts!
Copper stocks in LME-registered warehouses have declined 44% since June and a large part of these are concentrated in three places: New Orleans, Antwerp, and Malaysia where queues for other metals deliveries exist, making it difficult for rapid deliveries of physical copper. It has been said that of 400,000 tonnes of official LME stocks, only 16,000 are actually ready for delivery at the moment. At the same time, the owner of the second largest copper mine (located in Indonesia), warned of a potential 60% decline in production in 2014, as they perceive a huge negative impact will result from the planned ban on unprocessed ore exports in the country.
With very low stocks and a negative development on the supply side, it seems “Dr. Copper Mark 2” has wisely chosen his timing… From the standard contango situation, a backwardation of upto $200 could result if the squeeze continues and history is any guide. Another buy argument for Kazakhmys perhaps with the “anal”ysts so far behind the curve they can’t even see it?!