By Ambrose Evans-Pritchard
The Telegraph, London
Saturday, May 13, 2006
http://www.telegraph.co.uk/money/main.jhtml? [1]
xml=/money/2006/05/13/cncopp13.xml&menuId=242&sSheet=/money/2006/05/1
3/ixcitytop.html
The spike in copper prices over recent weeks has left a group of
banks and operators on the London Metal Exchange (LME) nursing vast
losses, raising concerns about the stability of the commodities
market.
The banks have been caught out by a sudden widening in the gap
between the price of three-month futures and that of long-term
futures, for December 2010 or April 2011.
"The dramatic differential we have seen over the past six weeks has
cost them a huge amount of money," said a market source. "The bigger
players can absorb the losses but smaller operators have nowhere to
hide."
Copper surged this week to an all-time high of $8,875 a tonne,
rising almost 10 percent on Thursday. Yet futures prices for April
2011 are just $3,778 a tonne.
Barclays Capital denied reports that it faced losses of 500 million
on copper trades, saying that it would have issued a statement if
such claims were true.
Banks help to finance the LME's $3,000 billion trades each year,
often taking on long-term hedges from metal producers, which they
cover by selling short-term futures. If the two suddenly diverge, it
plays havoc with their books.
Adding to the intrigue, the LME's chief executive, Simon Heale,
unexpectedly said on Thursday that he would be stepping down by the
end of the year. His spokesman denied that there was any link to the
metals mayhem this week, insisting that Mr Heale wished to spend
more time with his family.
Copper has doubled in price this year even though industrial demand
is flat.
"This is fairyland," said Richard Elman, head of the Noble
Group. "We have never seen such a disconnect between reality and
pricing of raw materials. The long-term story is sound but the short-
term froth is patently frightening."
William Adams, an analyst at BaseMetals.com, said demand for copper
tubes was collapsing as producers switched to PVC plastics. The
market in Germany has halved from 90,000 to 45,000 tonnes. "There's
a very rapid switch from copper. When it turns, copper could easily
drop $1,000 a tonne in one day," he said.
David Threlkeld, a veteran copper trader, said the market had
been "out of control" for months, allowing speculators to run
roughshod over industrial producers and users. "The LME has been
seduced by hedge funds," which have "pushed prices to levels
unsupported by fundamentals. There's a vacuum below and the crash
could set off a chain of margin calls running through the whole
commodities sector. We've got a crisis on our hands and it is a lot
bigger than copper," he said.
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