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**DanS** · November 15, 2005, 17:50

What have they done to the poor trader who took these positions?

From the WSJ...

China Copper Trader Missing
Word of Big Short Position
Has Metals Dealers Asking
If State Can Deliver on Time
By ANDREW HOTTER
DOW JONES NEWSWIRES
November 14, 2005; Page C8

LONDON – A Chinese government copper trader, who is said to have built a big short position on the London Metal Exchange, has inexplicably ended contact with other dealers in both London and in China, people who have worked with the trader said.

Liu Qibing, who worked for China's State Reserve Bureau, took short copper positions that some London dealers said amounted to between 100,000 and 200,000 tons. The traders said the SRB would find it difficult to deliver the amounts of copper traded by what they said was a deadline of Dec. 21.

Mr. Liu, who couldn't be reached at his office at the SRB in Beijing, hasn't been at work for weeks, colleagues said. Traders on the London Metal Exchange who have dealt with Mr. Liu told Dow Jones Newswires they haven't heard from him for "many weeks." Some people familiar with Mr. Liu said he was removed from his job weeks ago.

The mystery surrounding Mr. Liu's whereabouts is provoking widespread speculation among metals traders in London, the U.S., and China about the size of the short position and its potential cost to the Chinese government. The speculation is that the SRB will have to scramble to meet the LME's requirement that the physical metal be delivered to approved LME warehouses. Some people who watch the copper market say they have seen more Chinese deliveries to Asian warehouses in recent weeks.

Compounding the confusion surrounding Mr. Liu, the SRB denies it has an employee with that name. Though London metal traders have Mr. Liu's business card, Wang Huimin, director of the SRB's Materials Management Center, denied knowledge of such a trader or of a London short copper position. "I've never heard of this person," he said. "Neither have I ever heard anything about the SRB selling short in London. I'm not clear if he is our staff. The SRB has no traders."

Chinese demand has helped lift copper prices for almost two years. The London Metal Exchange, which accounts for 90% of the world's global metals-futures trade, plays a major role in setting copper prices.

Mr. Wang said the SRB trades copper primarily on the Shanghai Futures Exchange, mostly through Cofco Futures Co. He said copper reserves are ample and China always is ready to cool domestic prices.

LME traders said they think the SRB is trying to give the impression it has no shortage and isn't worried about meeting delivery obligations. If its actions cause the price to drop, it would be able to reduce its losses, LME traders said.

Most LME players say long positions are widely held, primarily by fund managers. Chinese analysts said they think the SRB may be scrambling to buy copper in a tight market for delivery.

If Mr. Liu's short position is between 100,000 and 200,000 tons, it would be huge by LME standards. Copper stocks on the LME were only 65,350 tons on Friday, a level generally considered low.

Traders in London, Beijing, New York and Shanghai said Mr. Liu went short by 100,000 to 200,000 tons, mostly against the December date, betting the price was ready to fall. But as copper prices continued to rise toward $4,000 a ton, potential losses grew and Mr. Liu was removed from his job, said people familiar with the market.

Like all companies, the SRB likely would have used several brokers to handle its orders, a strategy that makes it difficult to independently assess the extent of its short positions or potential losses. If the SRB fails to meet its obligations under LME rules, its counterparties could face a financial loss.

LME spokeswoman Anna Campopiano said the exchange "doesn't comment on market rumor and speculation." Dow Jones Newswires interviewed about a dozen people around the world familiar with China's short copper position.

Traders in London and New York say SRB losses could be in the hundreds of millions of dollars. Such a loss would be the largest on the LME since Sumitomo lost an estimated $2.6 billion in 1996.

Even if the SRB has the copper, a big short position on the LME could be a problem. The reason is the LME requires delivery to go only to specific warehouses around the world, none of which are in China.

The SRB traditionally builds a strategic reserve of copper, although its size is a state secret. Estimates range from 100,000 to 500,000 tons, but many believe the strategic reserve is around 200,000 to 250,000 tons.

If Mr. Liu took short positions requiring delivery of as much as 200,000 tons, much of the estimated reserve would be depleted. People in China who follow the market said some of the SRB reserve dates to the early 1990s, raising questions about whether its quality would be acceptable to the LME.

**Starchild** · November 15, 2005, 17:53

Can you explain your maddening economic terms to a simple biochemist like myself?

**KrazyHorse** · November 15, 2005, 17:58

The Chinese central bank (?) let one of its traders borrow a ****load of copper from 3rd parties. He then sold this copper, but he has to give it back to its original owners by Dec. 21. This would be great if the price of copper went down.

Now the price of copper has gone up, there's not enough left on the world markets for the Chinese to buy (in order to "pay back" the original owners) and the unfortunate trader is nowhere to be found. People everywhere else in the world are profiteering off Chinese stupidity.

**Lawrence of Arabia** · November 15, 2005, 18:02

he short sold it, which means that he 'sold' it at say $4,000, and then planned on buying it back at say $3,500 and make $500 per unit. but since it increased to say $4,500 per unit, he loses $500 per unit.

**Seeker** · November 15, 2005, 18:05

time for me to melt down my pennies?

**DanS** · November 15, 2005, 18:07

Further to KH's description, the mere rumor that China is unable to deliver enough copper to the market makes the position much harder to "cover" (i.e., for China to give back the copper to its original owners), which in turn fuels the rumors. It's a spiraling screwjob, unless the Chinese can do something big to prove to the market that it can deliver the borrowed copper on December 21.

**DRoseDARs** · November 15, 2005, 19:55

Originally posted by DanS
Further to KH's description, the mere rumor that China is unable to deliver enough copper to the market makes the position much harder to "cover" (i.e., for China to give back the copper to its original owners), which in turn fuels the rumors. It's a spiraling screwjob, unless the Chinese can do something big to prove to the market that it can deliver the borrowed copper on December 21.

My copper pennies are on "Not gonna happen" in the sense they don't care enough to really try. They're screwed either way; there isn't much they can do at this point with little more than a month to go. This is going to bite them in the ass, but they'll probably weather it just fine.

**Urban Ranger** · November 15, 2005, 20:13

Liu Qibing, a Chinese trader, allegedly built up a substantial short position in copper in the name of SRB, said to be between 100,000 and 200,000 tonnes.

It would be interesting if this is all a ploy to hike up the market and sell.

**Zkribbler** · November 15, 2005, 20:33

Nothing like this has been seen since M&M Enterprises bought the entire crop of Egyptian cotton during WW II.

**DanS** · November 16, 2005, 01:20

Originally posted by Urban Ranger
It would be interesting if this is all a ploy to hike up the market and sell.

Possible, I guess. Doesn't seem likely, though.

**DanS** · November 16, 2005, 01:25

Oooh, got an editorial from the FT...

Copper puzzle raises questions for Beijing
Published: November 16 2005 02:00 | Last updated: November 16 2005 02:00

China's surging growth and rapid integration with the world economy is pushing it to play an ever-more prominent role in a host of global markets. This is a natural and welcome phenomenon. But the process is exposing shortcomings in the management and culture of Chinese entities thrust into prominence. The latest example of this is the State Reserve Bureau's apparent misadventures in the copper market.

China is the world's biggest importer of copper, an essential raw material for its industrial revolution. The SRB, which manages China's commodity reserves, has long been active in the copper market, traditionally playing a conservative role moderating prices to ensure secure long-term supplies.

In the past few weeks, however, something appears to have gone wrong. Liu Qibing, a prominent SRB copper trader, has disappeared from view. Market rumour suggests he had built up a large short position, in effect betting on a fall in the copper price - a bet that went badly wrong, leaving the SRB facing heavy losses.

The SRB's response has only added to the confusion: talking up Chinese copper stocks in what looks like an attempt to lower prices, while trying to disown Mr Liu, raising fears that it might try to repudiate his contracts.

The market has so far taken all this in its stride. Copper prices hit a fresh record high yesterday, but the London Metal Exchange continued to trade smoothly. The rumours could simply be wrong. It is anyway not unusual for traders to suffer big losses in a market with volatile prices. The SRB has China's credit behind it, and would surely not be so foolish as to repudiate contracts properly entered into.

Yet the SRB's response raises fears of a failure of internal controls, coupled with an intense fear of revealing any mistakes to superiors. That is worrying in any market participant, particularly a large one.

This is a familiar refrain to anyone who knows about recent Chinese misadventures, including the China Aviation Oil scandal in Singapore and corruption cases at state-owned banks.

It is not the task of London market regulators to prevent China from losing money at the hands of so-called "rogue traders". But authorities do need to keep a careful eye on SRB, to ensure it does not trade on the basis of insider information on China's copper demand, or worse, mislead the market as to the extent of its reserves.

Ultimately, though, it is China's job to act responsibly. The muddled response to questions over Mr Liu, and the sudden claim that China's reserves are many times greater than market estimates ill befit a country that aspires to play a leading role in the world economy. Few things are more essential to its continued success than well-functioning commodity markets. Greater transparency about its needs, its stocks and its mistakes would be in China's own national interest.

**Wraith** · November 16, 2005, 07:24

--"Nothing like this has been seen since M&M Enterprises bought the entire crop of Egyptian cotton during WW II."

Heh. Not quite this bad, but it looks like they're in training for it.

Honestly, do they have any financial types running their stock purchases? A major short position on an important commodity? By China, of all places? You'd think they'd know better.

While I'm here...

DanS, have you heard about this?

FRB: H.6 Release--Discontinuance of M3

http://www.federalreserve.gov/releases/h6/discm3.htm

Seems an odd thing to be doing. I'd love to hear the reasoning behind the decision to drop M3. Next they'll be adding hedonics to M2.

Wraith
"Coffee is a slow poison. It has to be. I have drunk eight cups a day for fifty years, and I am still not dead."
-- Voltaire

**laurentius** · November 16, 2005, 08:35

Copper markets are dangerous! Remember Mr. Copper AKA the 5% Man and others, this happens every now and then in LME.

Laundering heroin money or gambling

**Lawrence of Arabia** · November 16, 2005, 09:21

china doesnt want the copper prices to go UP, the more up they go the more money they LOSE. they want prices to go DOWN becuase he SHORT SOLD them. hiking upthe market is the LAst thing they want to do.

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China caught in a monumental short squeeze!

China caught in a monumental short squeeze!

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