It may not be as sexy as gold and silver, but sometimes even doctor copper needs a little squeeze and corner love as well, and according to Bloomberg, that is precisely what someone is trying to do.
One company whose identity is unknown, is "hoarding as much as half the copper available in warehouses tracked by the London Metal Exchange."
However, unlike the famous cornering of silver by the Hunts in 1980 which sent the price soaring if only briefly, in this case the unknown manipulator is trying to push the price of the physical lower. By taking control of half the available copper, the trader can help drive up the fees associated with rolling forward a short position, making it tougher for speculators to keep their bearish, explains Bloomberg.
Indeed, as shown in the chart below, this week the borrowing cost jumped to the highest in three years, almost as if someone is desperately trying to punish the shorts in a strategy very comparable to what Shkreli did with KBIO, when he bought up 70% of the outstanding stock and then made removed his shares from the borrowable pool, forcing a massive short squeeze.
In its disclaimer warning, Bloomberg writes that the episode, which caught traders by surprise "is one example of the perils of trading on the London Metal Exchange, where contracts are physically settled and speculators can end up paying dearly if they leave their bets without an offsetting position. Money managers are holding a net-short position on the LME, with prices down 23 percent in the past year and no sign of a recovery in Chinese demand."
Meanwhile, market participants are quietly moving to the sidelines ahead of what may be some serious copper price swings:
"A big trader is probably trying to squeeze the market," said Gianclaudio Torlizzi, the managing director of T-Commodity srl, a Milan-based consultancy.“It’s an indication the supply side in copper is tightening."
Bloomberg adds that yesterday was the third Wednesday of the month, when many traders settle their commitments. To renew a short position, traders have to buy back metal while selling it forward. The tom-next spread, a measure of how much the process costs over one day, jumped as high as $30 a metric ton on Tuesday, the highest since May 2012.
The declining amounts of physical copper mean that liquidity in the metal is evaporating, resulting in violent, sharp price swings. The amount of metal available in warehouses has dropped more than 40 percent since August, making it costly to roll shorts.
So who is trying to corner the plunging in price metal? According to Bloomberg, the suspect who controls a large portion of the copper is an unidentified company. "Two firms held 40 to 49 percent of copper inventories and short-dated positions, according to Jan. 19 exchange data that shows holdings as a proportion of available stockpiles. While the LME provides data on the approximate size of large positions, it doesn’t disclose who is behind them."
One wonders if perhaps the question is not which company is behind the cornering, but rather which country.
Still, no matter who is behind this attempt to artificially push copper prices higher - which may explain the recent industrial metal strength - one can't help but wonder how it plays out, because there is hardly a "cornering" episode in history that does not end in tears.
And certainly not in copper, where cornering attempts are nothing new, but perhaps few instances of manipulation are quite as infamous as that of "Mr. Copper" Yasuo Hamanaka. For those who are unfamiliar, here is a brief recap of what happened in the mid-1990's.
The Copper King: An Empire Built On Manipulation
The commodities market has grown in importance since the 1990s, with more investors, traders and merchants buying futures, hedging positions, speculating and generally getting the most out of the complex financial instruments that make up the commodities market. With all the activity, people dependent on futures to remove risk have raised concerns over large speculators manipulating the markets. In this article we'll look to the past for one of the biggest cases of market manipulation in commodities and what it meant to the future of futures.
The 5%
There is still a sense of mystery surrounding Yasuo Hamanaka, a.k.a. Mr. Copper, and the magnitude of his losses with the Japanese trading company Sumitomo. From his perch at the head of Sumitomo's metal-trading division, Hamanaka controlled 5% of the world's copper supply. This sounds like a small amount, since 95% was being held in other hands. Copper, however, is an illiquid commodity that cannot be easily transferred around the world to meet shortages. For example, a rise in copper prices due to a shortage in the U.S. will not be immediately canceled out by shipments from countries with an excess of copper. This is because moving copper from storage to delivery to storage costs money, and those costs can cancel out the price differences. The challenges in shuffling copper around the world and the fact that even the biggest players only hold a small percentage of the market made Hamanaka's 5% very significant.
The Setup
Sumitomo owned large amounts of physical copper, copper sitting in warehouses and factories, as well as holding numerous futures contracts. Hamanaka used Sumitomo's size and large cash reserves to both corner and squeeze the market via the London Metal Exchange (LME). As the world's biggest metal exchange, the LME copper price essentially dictated the world copper price. Hamanaka kept this price artificially high for nearly a decade leading up to 1995, thus getting premium profits on the sale of Sumitomo's physical assets.
Beyond the sale of its copper, Sumitomo benefited in the form of commission on other copper transactions it handled, because the commissions are calculated as a percentage of the value of the commodity being sold, delivered, etc. The artificially high price netted the company larger commissions on all of its copper transactions.
Smashing the Shorts
Hamanaka's manipulation was common knowledge among many speculators and hedge funds, along with the fact that he was long in both physical holdings and futures in copper. Whenever someone tried to short Hamanaka, however, he kept pouring cash into his positions, outlasting the shorts simply by having deeper pockets. Hamanaka's long cash positions forced anyone shorting copper to deliver the goods or close out their position at a premium.
He was helped greatly by the fact that, unlike the U.S., the LME had no mandatory position reporting and no statistics showing open interest. Basically, traders knew the price was too high, but they had no exact figures on how much Hamanaka controlled and how much money he had in reserve. In the end, most cut their losses and let Hamanaka have his way.
Mr. Copper's Fall
Nothing lasts forever, and it was no different for Hamanaka's corner on the copper market. The market conditions changed in 1995, in no small part thanks to the resurgence of mining in China. The price of copper was already significantly higher than it should have been, but an increase in the supply put more pressure on the market for a correction. Sumitomo had made good money on its manipulation, but the company was left in a bind because it still was long on copper when it was heading for a big drop.
Worse yet, shortening its position - that is, hedging with shorts - would simply make its significant long positions lose money faster, as it would be playing against itself. While Hamanaka was struggling over how to get out with most of the ill-gotten gains intact, the LME and Commodity Futures Trading Commission (CFTC) began looking into the worldwide copper-market manipulation.
Denial
Sumitomo responded to the probe by "transferring" Hamanaka out of his trading post. The removal of Mr. Copper was enough to bring the shorts on in earnest. Copper plunged, and Sumitomo announced that it had lost over $1.8 billion, and the losses could go as high as $5 billion, as the long positions were settled in a poor market. They also claimed Hamanaka was a rogue trader and his actions were completely unknown to management. Hamanaka was charged with forging his supervisor's signatures on a form and was convicted.
Sumitomo's reputation was tarnished, because many people believed that the company couldn't have been ignorant of Hamanaka's hold on the copper market, especially as it profited from it for years. Traders argued that Sumitomo must have known, as it funneled more money to Hamanaka every time speculators tried to shake his price.
Fallout
Sumitomo responded to the allegations by implicating JPMorgan Chase and Merrill Lynch. Sumitomo blamed the two banks for keeping the scheme going by granting loans to Hamanaka through structures like futures derivatives. All of the corporations entered litigation with one another, and all were found guilty to some extent. This fact hurt Morgan's case on a similar charge related to the Enron scandal and the energy-trading business Mahonia Ltd. Hamanaka, for his part, served the sentence without comment.