The best summary I've read on the copper situation.
China comes a cropper in copper deal
A trading gamble gone wrong may leave China red-faced, report Mike Sheridan and Louise Armistead
November 21, 2005
A RUMOUR swept through the City's commodity trading floors 10 days ago that Liu Qibing, the main metals trader for the Chinese Government, had vanished in Beijing.
The 39-year-old was a familiar figure in the global metals market and the London Metal Exchange. "We all know Liu," said one broker. "He comes over a lot for business and beers. He likes London -- he is very proud of his (City) qualifications."
Concerns arose after brokers called his office, home and mobile numbers but couldn't track him down. "People in his office said he was on leave," said the broker. "Then they stopped answering his phone. Nobody was picking up at his home number or mobile."
Over the weekend, Lui's disappearance began to be linked to the metal market's other big rumour -- that someone had taken a vast bet, or short position, that the copper price would fall this year and was now suffering as the market had turned against him. Traders were convinced Liu had placed the position on behalf of the Chinese Government and was now taking the blame.
But last Monday, Chinese officials surprised everyone by telling reporters that they had never heard of Liu and that he didn't work for them.
Over the next few days, intrigue descended into bizarre confusion as officials in China did nothing to stem rumours that they were the victims of a large fraud executed by a rogue trader.
Liu, apparently incommunicado at home in Beijing, was being described as the new Yasuo Hamanaka, or Mr Copper, the trader who racked up $US2.6 billion losses at Sumitomo bank in 1996.
Chaos continued as brokers in London said they didn't believe China's fraud theories. Neil Buxton, metals consultant at GFMS, said: "This is not a fraud. It's a trading position that has gone wrong."
Another said: "Liu wouldn't be allowed to do these trades without higher authority and London counterparties would not accept them. China is blaming him because they've lost a lot of money and it's embarrassing. It's a face-saving exercise."
But if this was the plan, it has backfired. The already volatile global copper price has swung wildly but China has yet to clarify its position. One thing clear is that China stands accused by traders of confusing the markets with its statements.
Worse still, brokers said this was not an isolated incident but a sustained attempt over the past few months to drive down the price of copper because of China's bad short position.
Robin Bahr, an analyst at UBS, the investment bank, said: "The global trading system is in flux, but it is robust. The wider issue is the question of China's behaviour and whether its actions were responsible. The Government was pushing spurious information months ago, apparently to get prices down. They managed instead to confuse the market. This is almost market abuse.
"If China is going to become the world's No1 economy, this needs to be sorted out."
The week before US President George Bush's visit to China and a fund-management conference in Beijing, the world's political and business eyes were focused on China for all the wrong reasons: how had the rumour of a small copper debt grown into an assault on China's integrity?
At the centre of the row is the State Reserves Bureau (SRB), which regulates the inflows and outflows of raw materials. So crucial is the department deemed to be to the country's rapidly expanding economy that officials report direct to the State Council, China's equivalent of the cabinet.
The department is also responsible for formulating China's official trading strategy, which is then handed out to carefully selected and retained brokers.
Lui, one of the select few, was in charge of implementing China's copper strategy. This involved several trips a year to London to meet brokers and LME members. As such, he was the public face of China's copper trading, although, as the Government said last week, he is not a direct employee.
Traders in London said Liu had built up a large short position this year -- and would have to sell between 100,000 tonnes and 200,000 tonnes of copper and deliver it to the LME by December 21.
If this was the case, Lui must have been implementing an SRB strategy based on copper prices falling this year. It has been a popular position: 2004 was a record year for copper so traders felt there was a glut. However, prices have soared more than 30 per cent because of problems in the global supply chain.
Traders said China had been talking down the price of copper for months -- a policy they now attributed to the supposed short position. "In August and September the secretive SRB started breaking with its long-held tradition and was being very open," said Bahr. "It was at a time when people were concerned the copper market was far tighter than had been thought.
"Recently the SRB, which had always been very quiet, has started talking about copper to anyone who would listen. It said it had 1.3 million tonnes which it planned to deliver to the LME. It said the high copper price was bad for the Chinese economy and should come down. It was highly unusual for a semi-government agency."
But in recent weeks more bad news about the copper supply in Chile has sent prices soaring again. Traders said the short position had became harder to hide and eventually Liu was suspended about six weeks ago.
Meanwhile, the SRB's counterparties in London were panicking. Of the eight brokers, the biggest, Standard Bank and Sempra, were most exposed. Jim Coupland, head of base metals at Standard Bank, made his sixth visit to the SRB in a month.
By last week, as the fate of Liu and the short position hit the headlines, even the docile media in China were questioning the conduct of the SRB. One newspaper even questioned the SRB's claim to be sitting on 1.3 million tonnes of reserves, quoting an analyst as saying the market was "deeply suspicious" about the statement.
Wang Chuanglian, analyst at the Great Wall fund in Shenzhen, said: "The Chinese Government is trying to interfere in the market and bring down the copper price. It's going to be a big gamble between the Chinese Government and the international speculators -- just like the contest between Britain and George Soros over the pound."
There is evidence the authorities realised the seriousness of the situation three weeks ago, when they put 52,000 tonnes of copper on the market at the Shanghai Futures Exchange. Last Wednesday they auctioned 20,000 tonnes and announced that another 20,000 tonnes would be sold a week later.
Reports were also circulating among traders that the SRB was shifting some 18,000 tonnes to a warehouse maintained by the LME in Pusan, South Korea.
But, by most traders' calculations, China will still be short of some 130,000 tonnes to meet its commitments to the LME. Liu is reported to have entered into futures contracts at $US3200 a tonne. Copper was trading above $US4700 in London last week.
The Sunday Times
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