Monday, January 24

The copper chaos is the latest in a rich history of wild metal changes

Wild moves in the copper market this week have sent traders into the history books. As inventories on the London Metal Exchange fell to their lowest level in decades, the price of spot delivery contracts rose to a record premium of more than $ 1,000 per tonne for three-month delivery contracts. , the hallmark of a reduced supply. The exchange has responded by launching an investigation and imposing emergency rules.

While there have been no signs of irregularities in the contraction this month, the LME has a rich history of wild price movements when markets are either over-supplied or under-supplied. In fact, it is an inheritance as old as the exchange itself.

Traders on the floor of the protest pit at the London Metal Exchange Ltd. Photographer: Jason Alden / Bloomberg

The Syndicate Secretan

One of the first corners of the LME began in 1887, just a decade after the exchange’s founding. It was led by Pierre Secretan, the director of France’s largest brass manufacturer, the Societe Industrielle et Commerciale des Metaux, who formed a union with the intention of taking over the copper market. He bought metal stocks and signed contracts with the world’s leading copper mines, and ended up controlling 80% of the world’s supply. Prices more than doubled. But high prices pushed production up and Secretan was no longer able to finance the huge volumes of copper it needed to buy to keep the price at its inflated levels. Copper prices collapsed, causing disastrous losses for Secretan and its bankers.

The tin crisis

In 1985, the LME faced a crisis of another kind: a glut of metal. Under an agreement involving 22 countries, the International Tin Council bought and sold tin on the LME with a view to keeping prices stable. But on the morning of October 24, 1985, the ITC collapsed: it could no longer support prices and defaulted under the weight of its obligations. The LME suspended tin trading amid “Armageddon” warnings in the market. It only resumed four years later, in 1989.

Marc rich

Starting in 1991, Marc Rich + Co tried to corner the zinc market. Together with two large zinc producers, the trading house bought more than 90% of the LME’s zinc stocks and managed to bring the price to a two-year high. But then the LME intervened, putting a cap on backwardation and allowing anyone with a short position to postpone delivery. It wasn’t long before prices started to fall. Marc Rich + Co ended up losing $ 172 million, in a crisis that precipitated Rich’s exit from the company he founded (and later became Glencore Plc).

Mr. 5 percent

For much of the 1990s, Yasuo Hamanaka, a trader for Sumitomo Corp. of Japan, was known as “Mr. 5 percent ”for its alleged participation in the world copper market. It took big positions on the LME, which drove prices up. But its apparent dominance of the market began to unravel when prices fell in 1996. When the full scope of its operations became clear, it was revealed that it was hiding losses of more than $ 2 billion in what Sumitomo said were unauthorized operations. Hamanaka was sentenced to eight years in prison. The LME responded with a drastic rule change in an attempt to avoid market corners in the future: it introduced a “loan guide”, forcing any operator with a great position to lend it to other market participants.

No more nickel

The LME intervened in the nickel market in August 2006 after stocks fell to their lowest level in decades and prices reached record levels. This time there was no trader responsible for the move, which was the result of a combination of strong demand from China and a strike at a major mine in Canada. The LME responded by imposing a cap on the decline in nickel prices. “These are exceptional circumstances,” LME CEO Simon Heale then told Bloomberg at the time. “It is an incredibly tight market.”

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