Dark rumours of black magic in the copper market
Dark rumours have been swirling on the London Metal Exchange. As the price of copper has soared recently - with the spot price climbing to US$5,625 a tonne on Monday, 103 per cent above its December low - dealers have begun to whisper that there is mischief afoot.
Some believe that a shadowy but deep-pocketed investor is trying to corner the market. They recall rogue trader Yasuo Hamanaka's disastrous 1996 bid to manipulate the copper price - an attempt that ended up costing his employer Sumitomo Corp a massive US$2.6 billion - and argue something similar may be going on now.
Others suspect the mysterious buyer is loading up on copper in anticipation that a breakthrough in electric car technology will drive a surge in demand for the highly conductive metal.
Still, others detect the sinister presence of 'Voldemort'; China's State Reserve Bureau, which they believe is building massive stockpiles of strategic materials in order to diversify the mainland's vast pile of foreign exchange reserves away from a declining US dollar.
The last hypothesis, although still wide of the mark, is probably the closest to the truth.
There is no doubt that China has been buying copper heavily on world markets in recent months. As the first chart below shows, the mainland's imports of refined copper have leapt this year.
Some of those purchases have been underpinned by genuine requirements. Beijing's economic stimulus programme includes a sizeable investment in the country's electricity grid, which will generate significant copper demand.
But that can't explain the recent tripling in China's refined copper imports compared with last year's monthly average. With the downturn this year in construction and in many manufacturing sectors weighing on demand, analysts at Credit Suisse expect the government's stimulus efforts to generate just 4 per cent growth in overall end-user demand for copper this year compared with last year.
As underlying user demand doesn't explain the massive volume of Chinese copper purchases, the finger of suspicion has naturally swung around to point at the State Reserve Bureau. The bureau is a secretive organisation, but analysts say it bought more than 500,000 tonnes of copper during the first half of the year, and some believe it may buy as much again in the second.
The bureau's demand is not insatiable, however, and there are good reasons to believe it will not continue buying at the same pace over the coming months.
The most obvious reason is that with copper prices up 100 per cent since the end of last year, the metal is no longer looking like such a bargain.
The second reason is that contrary to rumour, the bureau is not buying primarily to diversify China's ever-expanding foreign exchange reserves.
Copper would be a poor asset for a reserve manager. It is neither particularly liquid. Nor, as the second chart below shows, is it a reliable store of value.
In any case, with the price at US$5,600 a tonne, Beijing would have to buy more than the world's entire annual output of the metal in order to shift just 5 per cent of its existing stock of reserves into copper. In other words, the diversification benefit of buying the metal is negligible.
Far more likely is that the bureau simply took advantage of low copper prices during the early months of the year to rebuild its stockpiles, which were sorely depleted in 2006 when the bureau was forced to unload the metal to cover a rogue trader's mis-timed short sales.
Now, with the stockpiles restored and the copper price looking relatively expensive, it is likely the bureau will scale back its purchases over coming months.
Some dealers clearly think so. Copper futures fell 2 per cent in early dealing yesterday in London.
Maybe Voldemort's spell has been broken at last.