Monday, May 15, 2006
Selling in commodities has its own story as usual
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.
Simon Heale unexpectedly said that he would be stepping down by the end of the year
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 10pc on Thursday. Yet futures prices for April 2011 are just $3,778 a tonne.
Barclays Capital denied reports that it faced losses of £500m on copper trades, saying that it would have issued a statement if such claims were true.
Banks help to finance the LME's $3,000bn 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.
Posted by Unknown at 3:21 PM