The crash in the copper market, set off, in an attempt to bolster the metal's price, by Sumitomo copper trader Yasuo Hamanaka, has left the world's metal-trading floors shaking. The industry had known that the metal's fundamentals were weak, but the events of the past month, which suggest that the price was artificially high, have added a new skittishness.
Analysts have long argued that, in the medium term, as new and generally low-cost producers come on stream, the copper price would be depressed by a surplus. This forecast prompted numerous players to try to profit from forward copper sales.
Reports have linked three players -- Quantum Fund (managed by George Soros), the Tiger Fund (managed by Julian Robertson) and Montreal-based scrap dealer and metal speculator American Iron & Metals -- to concerted short selling on the London Metals Exchange and the Commodity Exchange of New York. Short sales were invariably met by heavy physical buying from Sumitomo; the big trading house's action forced the market into a spectacular, long-term backwardation, which has continued from September 1994 to today.
As the paper trail of unauthorized trades led to Hamanaka, the copper bears gained the advantage. On May 17, Herbert Black of American Iron & Metals sold the short heard round the world -- 50,000 tonnes, to which Hamanaka did not reply. The price fell 12% by the end of the trading day on May 20.
Since Black's crucial short sale, the copper price has had four more severe single-day dips: first on June 6; then on June 11, when rumors about Hamanaka's dismissal began to circulate; on June 14, when Sumitomo announced the trading; and on June 25, when physical copper reached a low of $1,745 per tonne (US79.15 cents) in curb trading on the London Metal Exchange (LME).
Fears that Sumitomo would dump its physical copper holdings on the spot market, in an effort to stem its losses, caused the price to fall again in the last week of June. Those concerns have begun to ease; London-based Metal Bulletin suggested that a dump-and-run strategy would not be in Sumitomo's interests -- or anyone else's -- since that would be likely to force the price even further down. With the rumoured bear raiders at Quantum, Tiger and American Iron & Metals all insisting that they are no longer short in copper, and with copper consumers still bargain-hunting in the long market, it seems the price has hit bottom.
Billiton Metals, the trading arm of South African mining house Gencor, noted in its weekly market report that the copper market remained "highly volatile," despite rallies on June 27 and July 2 that have brought the LME cash settlement price back to US$1,997 per tonne (US90.58 cents per lb.) and narrowed the difference between spot and 3-month copper to US$54 per tonne.
Billiton attributes the stronger price to short sellers, who are finding it necessary to buy physical copper to cover existing short positions. The company still thinks there are enough traders in the market with substantial long positions that any upward price move would meet with resistance when the long buyers try to get out.
Estimates of the loss taken by Sumitomo have ranged from the company's officially announced figure of US$1.8 billion (198 billion yen) to a high of US$4 billion (440 billion yen). Metal Bulletin noted that Sumitomo can probably absorb the massive loss, whatever its size, since it has a 150-billion-yen cash reserve for market losses, and projected pretax earnings of 45 billion yen. The company also has paper gains in the stock market and in real estate that could offset even the highest estimate of the loss.
Still, there was widespread worry in the copper market that the collapse of the price would force marginal projects to go under. As events have played out, it seems that the new low-cost projects are the ones having trouble.
The first apparent casualty was the Lomas Bayas project in Chile, which was put on hold in early July when owner Gibraltar Mines (GBM-T) found it could not get a firm agreement for debt financing for the project. Gibraltar, which needed a US$160-million credit facility to meet the mine's US$240-million capital cost, expects development will be delayed until investors are no longer jittery over new copper projects.
The savage twist for Gibraltar is that Lomas Bayas was expected to have an initial cash cost of production around US47 cents per lb., low enough to make money in almost any copper market. On the other hand, its namesake mine, in central British Columbia, is a marginal producer -- with cash costs of US$1.02 per lb. in 1995 -- and could well be knocked out of the ring if the copper price stays low.
Sumitomo itself has assured Imperial Metals (IPM-T) that its 45% participation in the Mount Polley project, not far from Gibraltar, is still in effect. If, as has been suggested, Sumitomo has the backing to weather its losses in the copper market, coming up with the cash may present no problem.
There may be one blessing in the market's troubles. As the copper price falls, its main competitor, aluminum, loses its main advantage.
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