Copper trader missing

Crouching trader, leaping prices

Nov 17th 2005
From The Economist

How a big bad bet is pushing up the price of copper

ALL that remains is to sell the film rights. Liu Qibing, a trader handling China's strategic commodity reserves, allegedly shorted the vast quantity of 100,000-200,000 tonnes of copper, then vanished when prices moved against him. The stuff of latter-day legend, this briefly pushed an already upwardly mobile market into near-vertical ascent.
“Shorting” a commodity involves borrowing the commodity itself and selling it to someone else with the intention of buying more later to return to the lender. A trader only does this when he believes, with some confidence, that prices will fall. Since copper has gained more than 30% this year and more than 200% since 2003, it is reasonable to think it due for a drop. Plenty of other traders and speculators have bet that way too.
But the metal is not obliging them. The three-month contract on the London Metals Exchange (LME) was already trading at record levels on November 11th, closing at $4,105 per tonne. When the tale of Mr Liu broke on November 14th, rousing expectations that China would have to buy a lot of the red stuff to meet commitments, it closed $20 per tonne higher. Copper hit a new record price of $4,174 on November 15th, and moved higher still on November 17th.
Mr Liu's copper is due for delivery to LME-approved warehouses in December. Will it be there? China claimed last week to have 1.3m tonnes of the metal stockpiled, far more than most western analysts reckon it has. This week, it held its first copper auction ever, selling 20,000 tonnes and pledging to unload more on November 23rd. And there is talk that the State Reserve Bureau, for which Mr Liu was acting, has applied to export 200,000 tonnes this year.
But this all sounds more like deliberate market-cooling before a purchase than like a surfeit of supply. Copper is scarce these days. Years of commercial underinvestment, together with work stoppages that grew more bitter as the copper price rose, have kept a lid on worldwide output. Last week Chile, the largest producer by far, lowered its output targets for 2005 and 2006.
Demand, meanwhile, was booming, until this year. And in fast-growing China, now the world's largest copper user, it is still increasing by leaps and bounds. The usual cushions of inventory and spare capacity have vanished: global stocks are depleted, as the chart shows. Mining companies should respond to this by investing in increased production. But the results will come, if at all, some years down the track.
The fall-out from Mr Liu's speculation-gone-wrong is hard to judge. If he assumed his positions last spring, as some suggest, when copper prices were below $3,300 per tonne, it is possible that the losses now amount to $200m.
But more than money may be at stake. China was expected to liberalise its derivatives markets a touch next year. After this bruising brush with those outside, it may be disinclined to do so.