Tweet
By Lucy Hornby
SHANGHAI, Nov 16 (Reuters) - China's secretive State Reserves Bureau sold copper through its first public auction on Wednesday and announced a second sale, in a bid to convince the market it had the clout to deflate rocketing world prices.
The bureau said it would sell 20,000 tonnes of copper on Nov. 23 after it sold the same amount on Wednesday.
The unusual auctions came as prices stayed high, supported by the possibility the bureau would have to cover a bet worth hundreds of millions of dollars that prices would fall.
The sale pressured local spot market prices, but has so far failed to dent benchmark copper futures on the London Metal Exchange, which hit a new record overnight of $4,174 a tonne. LME three-month copper was quoted at $4,130/$4,140 a tonne by midday on Wednesday.
"The sale has been expected in the market for some time without having succeeded in pushing down the LME, so we wouldn't expect it to have an effect on the LME now," said analyst Cai Luoyi of China International Futures Co.
"Most lots have sold between 38,500 and 38,600 yuan
(between $4,762 and $4,775) a tonne, which is in line with the market's valuation."
The bureau has made no secret of its desire to drive down global copper prices, and has said it has 1.3 million tonnes in reserve to do so. Many traders have interpreted the unusual openness as a desperate effort to unwind a dangerously large short position.
Liu Qibing, who handled LME trading for the bureau, has been uncontactable for a few weeks. Traders say he had a short position of 150,000 tonnes to 200,000 tonnes on the LME.
That compares with world exchange stocks of 140,000 tonnes, of which the LME holds 65,000 tonnes, Barclays Capital analyst Ingrid Sternby said in a research report on Tuesday.
Bureau statements that the trader acted on his own raised questions of whether the bureau would honour the obligations or leave its brokers exposed.
If exercised this spring, when the market believed copper futures had peaked at $3,000 a tonne, the position would have represented a loss of more than $200 million.
The cocktail of high prices and a substantial short position by a large Asian player remind many market participants of 1996, when copper markets crashed after Sumitomo Corp. (8053.T: Quote, Profile, Research) revealed $2.6 billion in losses from short positions taken by rogue trader Yasuo Hamanaka.
EMPTYING WAREHOUSES
But some of the copper auctioned by the bureau on Wednesday pre-dates the Hamanaka scandal, leading some bullish traders to bet that the bureau was clearing out its warehouses.
China's reserves of copper, like those of grains and gold, are a state secret. The bureau normally buys and sells without fanfare, and some traders believe it has recently purchased copper from large domestic producers.
Auction prices were below spot prices in eastern China, which dropped 330 yuan to 38,900 yuan to 39,000 yuan a tonne on Wednesday. The bureau's auction included older lots of copper that might therefore fetch a discount to current spot prices.
By selling in China, the bureau has widened the price gap between Chinese and global markets. That may discourage Chinese importers from buying copper, increasing global supply but causing the domestic market to tighten again.
"The price of the SRB sale, although soft, merely reflects the current softness in spot China premiums prior to the SRB's announcement of their intention to make sales," said Dominic Mound, a metals trader for ABN Amro in Australia.
"On a positive note, the fact the SRB is finding takers for its material does indicate there are buyers out there."
The auction's first sale, at 38,650 yuan a tonne for 100 tonnes of copper produced in the United States in 2004, set a positive tone and subsequent lots went briskly, traders said.
($1=8.0845 yuan)
SHANGHAI, Nov 16 (Reuters) - China's secretive State Reserves Bureau sold copper through its first public auction on Wednesday and announced a second sale, in a bid to convince the market it had the clout to deflate rocketing world prices.
The bureau said it would sell 20,000 tonnes of copper on Nov. 23 after it sold the same amount on Wednesday.
The unusual auctions came as prices stayed high, supported by the possibility the bureau would have to cover a bet worth hundreds of millions of dollars that prices would fall.
The sale pressured local spot market prices, but has so far failed to dent benchmark copper futures on the London Metal Exchange, which hit a new record overnight of $4,174 a tonne. LME three-month copper was quoted at $4,130/$4,140 a tonne by midday on Wednesday.
"The sale has been expected in the market for some time without having succeeded in pushing down the LME, so we wouldn't expect it to have an effect on the LME now," said analyst Cai Luoyi of China International Futures Co.
"Most lots have sold between 38,500 and 38,600 yuan
(between $4,762 and $4,775) a tonne, which is in line with the market's valuation."
The bureau has made no secret of its desire to drive down global copper prices, and has said it has 1.3 million tonnes in reserve to do so. Many traders have interpreted the unusual openness as a desperate effort to unwind a dangerously large short position.
Liu Qibing, who handled LME trading for the bureau, has been uncontactable for a few weeks. Traders say he had a short position of 150,000 tonnes to 200,000 tonnes on the LME.
That compares with world exchange stocks of 140,000 tonnes, of which the LME holds 65,000 tonnes, Barclays Capital analyst Ingrid Sternby said in a research report on Tuesday.
Bureau statements that the trader acted on his own raised questions of whether the bureau would honour the obligations or leave its brokers exposed.
If exercised this spring, when the market believed copper futures had peaked at $3,000 a tonne, the position would have represented a loss of more than $200 million.
The cocktail of high prices and a substantial short position by a large Asian player remind many market participants of 1996, when copper markets crashed after Sumitomo Corp. (8053.T: Quote, Profile, Research) revealed $2.6 billion in losses from short positions taken by rogue trader Yasuo Hamanaka.
EMPTYING WAREHOUSES
But some of the copper auctioned by the bureau on Wednesday pre-dates the Hamanaka scandal, leading some bullish traders to bet that the bureau was clearing out its warehouses.
China's reserves of copper, like those of grains and gold, are a state secret. The bureau normally buys and sells without fanfare, and some traders believe it has recently purchased copper from large domestic producers.
Auction prices were below spot prices in eastern China, which dropped 330 yuan to 38,900 yuan to 39,000 yuan a tonne on Wednesday. The bureau's auction included older lots of copper that might therefore fetch a discount to current spot prices.
By selling in China, the bureau has widened the price gap between Chinese and global markets. That may discourage Chinese importers from buying copper, increasing global supply but causing the domestic market to tighten again.
"The price of the SRB sale, although soft, merely reflects the current softness in spot China premiums prior to the SRB's announcement of their intention to make sales," said Dominic Mound, a metals trader for ABN Amro in Australia.
"On a positive note, the fact the SRB is finding takers for its material does indicate there are buyers out there."
The auction's first sale, at 38,650 yuan a tonne for 100 tonnes of copper produced in the United States in 2004, set a positive tone and subsequent lots went briskly, traders said.
($1=8.0845 yuan)
Like other countries don't do this.
UR 
Comment