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Business Analysis: Missing trader leaves China with $823m bill and copper at record high
Independent News & Media
Traders who were uncovered when the markets moved against them
By Philip Thornton, Economics Correspondent
Published: 16 November 2005
What is it about commodities and Asia that attracts rogue traders? A decade after Nick Leeson brought down Barings and Sumitomo's chief copper trader executed a $1bn fraud, a Chinese copper broker has gone missing.
The man, named as Liu Qibing, is said to have taken out a massive bet that copper prices, which have soared 30 per cent this year, were heading for a fall.
He is understood to have promised to sell between 150,000 and 200,000 tonnes of the base metal at the end of the year, assuming that he would be able to buy it cheaply when it was needed - known as going "short".
So far, so normal - especially for a region where gambling is a way of life. But there the pattern breaks down. While Nick Leeson was a rogue trader who played the market for his own gain but simply got in too deep, there are question marks over the link between Mr Liu and the Chinese government.
The story follows repeated attempts by China to lower the price of copper, which is a key ingredient for the country's red-hot manufacturing sector. Neil Buxton, a metals analyst for GFMS Metal Consulting in London, said China's normally secretive State Reserve Bureau (SRB) recently started to sell copper openly on the spot and futures markets, in a move traders viewed as trying to push down prices. "There have also been attempts to talk the markets down that have been proved to be unproductive," he said. "Users of copper have been complaining to the government all year that their profit margins have come under extreme pressure from the rising price of copper."
The immediate suspicion was that China had embarked on a major "shorting" exercise to back up its words on the need for lower prices. Initially, however, the SRB, the Beijing-based government agency that manages the country's metals reserves, denied that Mr Liu existed. "We do not have such a person working for us, " its head of information told the Asian newspaper that first broke the story. Then it changed its tune, saying if there were short positions held, they were the responsibility of this trader and not the SRB. Finally it emerged that Mr Liu, who was named as a head of physical and futures trading, working for part of the SRB, had been on leave for several weeks after news of the trades first emerged.
Whatever the truth, these trades, which were placed through the London Metal Exchange (LME), will have to be settled. At the current all-time record price of $4,115 a tonne, that would equate to some $823m.
John Meyer, a mining analyst at Numis Securities in London, said traders had speculated that the SRB intended to deliver physical copper to close out these short trades that were reportedly due on 21 December.
"While it would now appear difficult to deliver sufficient tonnages of copper into LME warehouses by mid-December, short positions could be covered in Shanghai relatively easily," he said. "However, if the SRB maintains no knowledge of these unauthorised trades it would appear strange if they were to deliver copper against them." Mr Meyer said the SRB's denial of knowledge would leave the LME members who took on the contracts worried about whether they would be paid.
The LME declined to comment yesterday, other than to say it had measures to "maintain orderliness". To add to the intrigue, the South China Morning Post claimed Mr Liu had headed the SRB's London office. "He is a trader and definitely an official of the bureau," one trader told the paper.
Yesterday copper rose to a record in London for a third consecutive day on speculation China might have to buy metal to cover trading commitments. Copper for delivery three months ahead traded as high as $4,165 a metric ton, $25 more than Monday's record.
Kona Haque, senior commodities analyst at the Economist Intelligence Unit (EIU), said speculation would keep prices high in the short term. "The fact that a trader has a physical position in the market of up to 200,000 tonnes is quite significant," she said. "That has to be covered from somewhere at some point so China will have to seek the material to meet it."
Mr Meyer agreed, saying: "Funds continue to slow into metals for technical and more fundamental reasons at a time when physical demand remains strong due to ongoing global economic growth and inflation fears."
It was those conditions that created the climate for a speculative trade that had gone wrong, the analysts said. "Stocks have been dwindling really rapidly because of issues such as strikes in Chile but at the same time demand has been rising quite rapidly," Ms Haque said. "When markets rise so fast - and copper has been the big commodity story - and goes so ridiculously high that's when you get shortings and squeezing of the market."
Mr Buxton said the key issue was the existence of an electronic futures market running parallel with the physical market. "The physical market is extremely tight so that people who have chosen to go short may have to deliver on it," he said. "There can be a physical shortage of copper which would not be an issue in, say, the foreign exchange market."
China's explosive growth has been a key driver of the copper market. Its consumption is estimated to have surged 23 per cent over the last two years compared with 10 per cent across the world as a whole, according to the EIU. By 2007, China will make up a quarter of world demand.
China needs the metal for use in infrastructure projects - it is used in electrical wiring and piping, industrial goods and consumer items. It also uses copper in a wide range of manufactured export goods such as fridges, computers and mobile phones.
In the medium term, China may be granted its wish of lower copper prices once the speculative froth over the rogue trader has subsided.
Ms Haque said the Chilean strikes had been resolved, major expansion plans for new production were under way and there were already signs of weakening demand in North America and Europe.
"If you look at that, it shows an easing of market tensions when you start to see prices operating through demand and supply, and speculation takes a back seat," she said.
In 1973, the Texan brothers Nelson Bunker Hunt and William Herbert Hunt amassed half the world's silver supply as a hedge against inflation. The price rose from $1.95 an ounce to a peak of $54. The US government intervened and the price collapsed. The Hunts declared bankruptcy and in August 1988 were convicted of conspiring to manipulate the market.
Yasuo Hamanaka, the chief copper trader at Sumitomo, racked up $2.6bn of losses in 1996 after a 10-year effort to corner the market rebounded on him. Hamanaka, who was known variously as Copperfinger, Mr Copper, and Mr Five Per Cent for the proportion of the global copper trade he controlled at the height of his powers, was given an eight-year jail sentence after being convicted of fraud and forgery.
John Rusnak, a currency trader, was brought into Allfirst, a subsidiary of Allied Irish Bank, in 1993 to implement his novel trading strategy based on trading options. However he simply placed large sum unhedged one-way bets that the yen would increase in value against the dollar. The trades accumulated losses of $691m that he tried to conceal. He pleaded guilty to a charge of bank fraud in October 2002 and given a seven and half year jail term.
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