Economy Watch
Published November 18, 2005
Beijing expected to ramp up copper sales to cover losses
Wednesday's weekly sale fails to prevent metal rising to a record
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(LONDON) China's government may sell another US$400 million of stockpiled copper to drive down prices and raise funds to cover investment losses by one of its traders.
Backlash: Copper prices have shot up 31% this year as demand exceeds output. The shortfall in 2005 has been put at 343,000 tonnes but expected higher mine output next year could lead to a production surplus of 263,000 tonnes
The State Reserve Bureau in Beijing may sell 100,000 tonnes of the metal from its inventories at weekly auctions through the middle of December, said traders including Wang Zheng at Shanghai Dalu Futures Co.
The bureau plans to sell 20,000 tonnes on Nov 23, the National Development and Reform Commission, the top planning agency, said. It sold the same amount on Wednesday.
'By selling copper, they can get the money they need to resolve the losses and keep the price down,' said Wang in Shanghai. 'The next two weeks will be pretty critical.'
The sales on Wednesday failed to prevent copper rising to a record, taking its gain this year to 31 per cent.
Liu Qibing, deputy head of imports and exports at China's bureau, made trading bets that copper would decline, the Wall Street Journal said on Monday. Mr Liu built short positions on copper, meaning he sold metal he didn't own in the hope of buying it back later at a cheaper price.
The bureau, the country's stockpiling agency, has already sold more than US$240 million of copper this month as part of efforts to ease a shortage on domestic markets. China is the world's largest copper consumer.
The losses from Mr Liu's trades may reach hundreds of millions of dollars, said Mr Wang. 'Most probably they will deliver against some contracts and roll others over into next year,' he said.
Mr Liu hasn't been at work since last month, two people at companies that traded with him told Bloomberg, declining to be identified. He didn't answer e-mails or calls to his mobile and landline phones from Bloomberg. Bai Jing, a spokesman for the SRB in Beijing, declined to comment.
The SRB sold 40,000 tonnes of copper last week on the Shanghai Futures Exchange for delivery in January or February. 'Once they start selling, they may not find it easy to stop,' said Zhang Ronghui, copper analyst at China Minmetals Nonferrous Metals Corp.
The bureau may be the second Chinese state-owned organisation to get into trouble. In November last year, China Aviation Oil (Singapore) Corp sought protection from creditors after it ran up US$555 million of debt from trading oil derivatives. The company bet prices would fall. They have risen to records.
The stockpiling agency has several ways to resolve the wrong bets, according to analyst Li Yusheng from Antaike, a government organisation. It can deliver the copper against the contracts in December, from its reserves or by borrowing the commodity; or it can roll over the deliveries into a range of months next year.
The agency has 1.3 million tonnes of stockpiled copper, Reuters cited an official from the bureau as saying on Nov 11. 'The people who believe that are rather few,' said Ren Yunhe, analyst at Shanghai Shenyin Wanguo Research and Consulting Co, yesterday. 'It's a rather large amount.'
The bureau may negotiate with investors holding the long positions, or those who bought copper for future delivery in the hope prices would rise.
'The brokers involved, or another, might act for the party on the short side and seek the longs,' said Dominic Mound, director of base metals in Asia-Pacific for ABN Amro Holding NV, from Sydney.
Some analysts said China may not deliver enough metal to cool copper prices, prompting traders to believe prices will rise further as the SRB buys copper to cover its short positions.
Prices for copper may rise another 9 per cent 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 a Sumitomo Corp trader was cornering the copper market.
The metal's 37 per cent rally in the past 12 months has echoes of the Sumitomo scandal, when trader Yasuo Hamanaka hoarded metal, sending copper up 69 per cent in a year, said Mr Threlkeld, president of Resolved Inc in Scottsdale, Arizona.
Hamanaka admitted in 1996 to unauthorised copper trades that lost the Japanese company US$2.6 billion. He was jailed.
Another copper trader imprisoned for bets that turned sour was Juan Pablo Davila at Chile's Codelco, the world's No 1 copper producer, who was caught taking kickbacks from brokers who handled his losing trades. He was jailed for eight years after running up losses of more than US$100 million.
Copper prices this year have risen more than other metals on the LME such as aluminium and nickel, as demand exceeds output.
Standard Bank Group Ltd, a South African bank that trades on the LME, said in a Nov 1 report that the production shortfall in 2005 will be 343,000 tonnes. Next year, higher mine output will result in a production surplus of 263,000 tonnes. - Bloomberg
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