London Calling scratches the copper bottom

In an important recent presentation, a UK analyst who predicted a dramatic fall in the copper price a year ago has laid bare (or "bear"?) the underlying reasons for the metal's recent spectacular economic collapse.

According to Simon Hunt of the eponymous London consultancy, copper's price has been consistently manipulated by those deliberately holding the metal "off the market", and by others using derivative "instruments."

Hunt says there has been "a big difference between the tonnage of copper actually going into furnaces and that being reported as global consumption." Material "was being sold directly to financial institutions and others - thus being counted as consumption - with that material frequently being held off the market, so constituting a hidden stock. These hidden stocks probably total around 1.5-2.0 million tonnes held in China and elsewhere in the world."

It's not the first time this has happened. In fact, declares Hunt: "Bull (upswinging) markets in copper invariably are associated with manipulation." During the eighties, copper stocks were being held back,then "dribbled" onto the market which, says Hunt, was "a decisive factor in the Sumitomo affair (1). Hunt also argues that the ploy was associated with the spectacular demise of that supremely criminal derivatives trader, Enron (2).

A few years ago, the London Metal Exchange itself confessed that it had little idea of actually how much copper was truly available or the extent of actual demand, given apparent and surreptitious movements of the metal in and out of its own warehouses.

A dramatic copper rise? Pull the other leg!

Startlingly, claims Hunt:"[O]nce adjustments for the accumulation of these unreported stocks are made, the global market has been in surplus (sic) since mid-2005. The truth is that in the three-year period 2005 to 2007, world refined consumption rose by only 1.5% a year."

"This would imply that global copper consumption will grow at rates well below its long term average rate, especially when account is taken of substitution, which should continue despite the fall in price." (An important point, often negelected by the mining industry). Meanwhile, those who use copper in their products "will be under constant margin pressure so [they] will continue to design copper out of their systems if such action leads to cost savings."

The most optimistic prospect for the near term, says Hunt, is that global copper demand will rise by less than 2% - and may actually fall.

Even if demand rises, the key question won't be "how much new capacity will be required to meet the world's furnace needs." On the contrary,it will be "how much will have to be cut from existing capacity and that which is committed for commissioning..."

The implications of Simon Hunt's analysis are far-reaching. Current assertions made by some of his fellow analysts - as to how markets behave - often appear contradictory, aloof or downright incomprehensible. But he confirms what many laypeople instinctively feel: that the hidden hands of spectral speculators have falsified demand for one of our most important metals (and perhaps other metals, like nickel, too.)

The price of such a distortion of reality is paid, not merely in terms of obscene profits for hedge funds and derivatives traders, but through investment being channelled towards superfluous projects and exiguous exploration gambits that none of us needs.

The agonising cost (as we never fail to point out) is graphically registered in many thosands of lives and livelihoods, sacrificed to mining in West Papua or Peru, and now slated for DR Congo and elsewhere.

1) In short this "affair" transpired during the mid-late 1990s when a Japanese trader called Hamanka "cornered" the copper market, driving the metal's price up to US$2,000 a tonne. After the bubble burst his employer, Sumitomo, successfuly sued four commercial banks for US$2.6 billion in compensation because they had backed Hamanka in his illegal deals.

2) In 2002 a group of insurance companies filed a lawsuit against J. P. Morgan Chase, accusing the bank of engineering loans, disguised as derivatives trades, to boost the fortunes of Enron's subsidiary, Enron Metals Ltd which was then a lead trader on the London Metals Exchange.

Sources: On the Sumitomo affair: http://www.twentyfirstcenturypublishers.com/index.asp?PageID=298; on Enron Metals'trades: New York Times, 2/4/2002

[London Calling is published by Nostromo Research, London. Opinions expressed in this column do not necessarily represent the views of any other organisation, or individual, including the editors of this website. Reproduction is welcomed, so long as acknowledgment is given to Nostromo Research and any sources quoted.]

Copper: what does the price fall portend?

Simon Hunt

Simon Hunt Strategic Services
Weybridge, UK

2nd December 2008

To serious students of the copper market, the 60% fall in the copper price since early July was no surprise. What was surprising was how long the price had defied gravity and the real situation. The reasoning was mainly twofold. The first was a proper reading of the macroeconomic situation with its impact on global consumption; and the second was the knowledge that copper prices were being manipulated by groups who were both holding material off the market and others who were encouraging financial institutions to engage in holding leveraged positions and other instruments in the market.

Ever since the BIS and others had been warning that financial markets were heading for meltdown in the early months of 2007, it was clear that the global economy would slowdown sharply, yet there were persistent forecasts that the global copper market was tight and that prices could only advance higher. China and India would save the world's economy and copper consumption were the reasons given.

Reality did not meet these expectations because there was a big difference between the tonnage of copper actually going into furnaces and that being reported as global consumption. This is because material was being sold directly to financial institutions and others - thus being counted as consumption - with that material frequently being held off the market, so constituting a hidden stock. These hidden stocks probably total around 1.5-2.0 million tonnes held in China and elsewhere in the world.

This development is nothing new in the annals of copper: it happened massively in the 1978-1980 bull market, resulting in hidden stocks (estimated at the time to have been about 1 million tonnes) being dribbled onto the market throughout the following decade; it was a decisive factor in the Sumitomo affair; and it occurred with the demise of Enron. Bull markets in copper invariably are associated with manipulation. What is so different this time was the sheer scale of the operation.

The speech given by the US Attorney General on 23rd April 2008 and the testimonies of Michael Masters and others to Congress in the early summer indicated how the market is manipulated. It was these hearings that led to pension funds and other institutions starting to liquidate their positions.

In fact, once adjustments for the accumulation of these unreported stocks (held both in China and elsewhere) are made, the global market has been in surplus since mid-2005. The truth is that in the three-year period 2005 to 2007, world refined consumption rose by only 1.5% a year compared with its longer term trend growth of 2.7% a year.

This fact fits with market reality. Fabricators were always able to buy metal promptly at premiums well below those of producers. Had the market really been tight, as analysts kept on stating, spot premiums would have been consistently higher than those of producers.

The question is what happens now? The best that one can say for the world economy is that growth will be below trend for the next five years with the risk of something far more painful developing. This would imply that global copper consumption will grow at rates well below its long term average rate, especially when account is taken of substitution, which should continue despite the fall in price: for end users will be under constant margin pressure so will continue to design copper out of their systems if such action leads to cost savings.

Under the best case scenario, world consumption should grow by an average of only 1.7% a year to 2015, with very low growth rates in the nearby years, and under a worse case environment it might actually fall by 0.2% a year.

Pressure will then be on the supply side of the equation, not how much new capacity will be required to meet the world's furnace needs, but how much will have to be cut from existing capacity and that which is committed for commissioning, or, where capital has already been sunk.

The cutbacks needed to bring some semblance of balance back to the market are huge and will include cathode produced from secondary materials, SX/EW, though these operations will probably be the last to be cutback, and concentrate producers.

The conclusions are simple but dire. High copper prices and low treatment charges always result in low prices and high treatment charges, no matter what producers try to do. The secular bull market in copper prices ended in early July this year when copper prices hit $8950. Prices will be volatile around a falling trend which will probably last until around 2018. Post 2010, we will surely see prices below $2000.

* Simon Hunt was one of the founders of metals' analysis consultancy, Brook Hunt. In late 2005, he formed Simon Hunt Strategic Services which specialises in copper, global economics and China.