re: copper high Copper prices hit record after China trader's...

re: copper high Copper prices hit record after China trader's loss
By David Lague International Herald Tribune

FRIDAY, NOVEMBER 18, 2005


BEIJING Speculation that China will refuse to deliver up to 200,000 metric tons of copper from its reserves to cover a massive gamble on futures contracts is driving prices to record highs and unsettling the global market for the vital industrial metal.

Copper hit a record $4,160 a metric ton on Thursday before falling back slightly on Friday after Chinese state media reported that Liu Qibing, a futures trader based in Shanghai, had amassed futures contracts on the London Metal Exchange betting that prices would go down. Instead, prices have continued to climb sharply this year on strong demand from China's booming economy and some unexpected supply shortfalls from major producers in Chile and the United States.

If prices remain at their current levels or continue to rise, Liu's trades could lead to losses of $200 million or more, according to some analysts.

"The next step is to see whether they really want to deliver this copper," said a Shanghai-based market analyst who spoke on condition of anonymity.

Some traders and market analysts have suggested that China may refuse to honor the contracts, which come due on Dec. 21, after Beijing denied that Liu had been working for the government's secretive State Reserves Bureau when he made the trades.

"As far as I know, the loss was a result of his personal actions instead of the government," the official China Daily newspaper reported Thursday, quoting an unidentified official at the bureau. The paper also quoted the official as saying that Liu had formerly worked for an affiliate of the bureau but that an investigation had shown that he alone should be blamed for losses from short-selling copper futures.

Short selling involves pledging to deliver a commodity by a certain date at an agreed price. The seller gambles that the price will go down by the time the contract matures, so the commodity can actually be supplied for less and the difference becomes profit.

Industry analysts said it was doubtful that Liu would make such big trades without the approval of his managers. Analysts also said that Liu was a well-known trader who had earned substantial returns for the government.

Liu could not be reached for comment on Friday.

In a departure from China's normally secretive metals trading, the State Reserves Bureau has been advertising copper sales from its stockpiles in recent weeks in what appears to be a concerted attempt to depress prices. The price for copper has climbed almost 40 percent in the last 12 months. Senior officials quoted in the state media have suggested that China was prepared to sell a big proportion of its copper stockpile to bring prices under control.

The size of China's copper reserves, like its holdings of grain and gold, is a state secret. Estimates of the size of its copper reserves vary from 200,000 metric tons to 1.3 million metric tons, but most analysts maintain that it is unlikely that Beijing has accumulated more than 500,000 metric tons.

China is the biggest consumer of copper, a metal that is vital to the power, manufacturing and construction industries. Senior Chinese officials have complained that the sustained high price of imports was hurting the economy.

Analysts have suggested that the government's bid to lower prices was also aimed at reducing the potential losses from the futures contracts.

The reserve board auctioned off 20,000 metric tons of copper on Wednesday and has announced that it would sell another 20,000 metric tons next Wednesday.

On Friday, China's National Development and Reform Commission forecast that the country's copper consumption could increase 8.6 per cent next year to 3.8 million metric tons. Despite this increase, most market analysts expect the price of copper to ease as miners and processors increase production.

BEIJING Speculation that China will refuse to deliver up to 200,000 metric tons of copper from its reserves to cover a massive gamble on futures contracts is driving prices to record highs and unsettling the global market for the vital industrial metal.

Copper hit a record $4,160 a metric ton on Thursday before falling back slightly on Friday after Chinese state media reported that Liu Qibing, a futures trader based in Shanghai, had amassed futures contracts on the London Metal Exchange betting that prices would go down. Instead, prices have continued to climb sharply this year on strong demand from China's booming economy and some unexpected supply shortfalls from major producers in Chile and the United States.

If prices remain at their current levels or continue to rise, Liu's trades could lead to losses of $200 million or more, according to some analysts.

"The next step is to see whether they really want to deliver this copper," said a Shanghai-based market analyst who spoke on condition of anonymity.

Some traders and market analysts have suggested that China may refuse to honor the contracts, which come due on Dec. 21, after Beijing denied that Liu had been working for the government's secretive State Reserves Bureau when he made the trades.

"As far as I know, the loss was a result of his personal actions instead of the government," the official China Daily newspaper reported Thursday, quoting an unidentified official at the bureau. The paper also quoted the official as saying that Liu had formerly worked for an affiliate of the bureau but that an investigation had shown that he alone should be blamed for losses from short-selling copper futures.

Short selling involves pledging to deliver a commodity by a certain date at an agreed price. The seller gambles that the price will go down by the time the contract matures, so the commodity can actually be supplied for less and the difference becomes profit.

Industry analysts said it was doubtful that Liu would make such big trades without the approval of his managers. Analysts also said that Liu was a well-known trader who had earned substantial returns for the government.

Liu could not be reached for comment on Friday.

In a departure from China's normally secretive metals trading, the State Reserves Bureau has been advertising copper sales from its stockpiles in recent weeks in what appears to be a concerted attempt to depress prices. The price for copper has climbed almost 40 percent in the last 12 months. Senior officials quoted in the state media have suggested that China was prepared to sell a big proportion of its copper stockpile to bring prices under control.

The size of China's copper reserves, like its holdings of grain and gold, is a state secret. Estimates of the size of its copper reserves vary from 200,000 metric tons to 1.3 million metric tons, but most analysts maintain that it is unlikely that Beijing has accumulated more than 500,000 metric tons.

China is the biggest consumer of copper, a metal that is vital to the power, manufacturing and construction industries. Senior Chinese officials have complained that the sustained high price of imports was hurting the economy.

Analysts have suggested that the government's bid to lower prices was also aimed at reducing the potential losses from the futures contracts.

The reserve board auctioned off 20,000 metric tons of copper on Wednesday and has announced that it would sell another 20,000 metric tons next Wednesday.

On Friday, China's National Development and Reform Commission forecast that the country's copper consumption could increase 8.6 per cent next year to 3.8 million metric tons. Despite this increase, most market analysts expect the price of copper to ease as miners and processors increase production.