Copper Surges After Report Mysterious London Buyer Has Cornered Up To 90% Of Market

Copper prices are surging this morning (in the face of Goldman's recent warnings of a plunge), jumping 4 handles apparently on the heels of a WSJ story in which LME admits that a single buyer has snapped up more than half the copper held in London Metal Exchange warehouses, giving it control over a crucial source of supply and raising concerns among traders about the potential for higher prices. What is more remarkable is, as WSJ reports, on several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses. Though no confirmation has been given traders suggest the firm cornering the copper market is Red Kite Group, a London hedge-fund manager that focuses on metals trading.

As The WSJ reports,

A single firm has owned at least 50% of the copper in LME-licensed warehouses for much of the last four months. Accumulating such a dominant position became easier in June because the amount of metal under the exchange’s watch had plummeted, as had prices. The warehouses have held less than 160,000 tons of copper since mid-June, compared with more than 360,000 tons at the start of the year. Some analysts say copper production is running behind demand, forcing some users to draw on stockpiles in LME-licensed warehouses.

On several occasions in the last month, this buyer held as much as 90% of the world’s copper stored in LME-licensed warehouses, equal to about 140,000 tons, or enough to make the copper parts of the Statue of Liberty more than 1,700 times. As of Wednesday, the buyer owned between 50% and 80% of copper held in warehouses, according to the most recent exchange data.

Rumors are that it is Red Kite...

Established in 2004, Red Kite is now run by two of its founding partners, Michael Farmer and David Lilley, both alumni of the German industrial conglomerate Metallgesellschaft AG, which collapsed in 1993. The fund is known for its bold and extremely profitable trades involving copper, as well as other metals. Red Kite Group manages $2.3 billion, according to its website.

Red Kite declined to comment.

The London Metal Exchange, owned by Hong Kong Exchanges & Clearing Ltd. , doesn’t limit how much metal a single trader may hold in its warehouses, and says that it has mechanisms in place to prevent market squeezes—a situation in which holders of a large share of the supplies use their position to jack up prices.

Some traders say the concentration of so much copper under one firm’s control is already driving up prices. It costs about $72 more per ton to buy copper for delivery today than for delivery in three months.

“There’s no reason for anyone to be holding 70% of the stocks of the commodity,”said Jessica Fung, head of Commodities Metals at BMO Capital Markets.

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As Metal Bulletin notes,

The Red Kite metals fund posted returns of just over 50% in 2013 after a well-timed switch from a short to a long position in the copper market around the time that prices posted their lows for the year, well-placed sources told Metal Bulletin.

Simply put, they were the market (buying it up in hopes to corner the market)...

The long position delivered returns as copper prices rebounded to finish the year up nearly $700 from its 2013 low, but Red Kite also made strong returns on physical inventory and spreads as copper premiums jumped in Asia and the LME forward curve moved into backwardation, market sources told Metal Bulletin.

"The Red Kite switch was definitely up there as one of the big trades of the year; the volumes were huge," a source active in the copper market told Metal Bulletin.

At the time, sell-side analysts in particular were turning strongly bearish on the copper market, reacting in part to lagged evidence of the slowdown in demand that prompted Red Kite to run short positions around the start of the year, sources said.

"Good data is very hard to come by in the copper market, and at the time I think a lot of people were trading looking in the rear-view mirror," one observer of the company told Metal Bulletin.

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Summing it all up - Is Red Kite the next Amaranth?

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The irony of someone cornering another metals market a week after the death of Nelson Bunker Hunt is not lost on us.

China’s September gold imports hit five-month high

China's net gold imports from Hong Kong hit the highest in five months in September as the world's biggest consumer stocked up ahead of its National Day holiday.

Net imports from Hong Kong to the mainland 61.7 metric tons last month, the most since April,according to Bloomberg.

Total gold imports from Hong Kong totalled 91.745 tonnes, as the nation observed its annual holiday the first week of October, a time when millions of people travel and spend more than usual. It also marks a pick-up in weddings, boosting demand for gold jewellery.

When gold entered a bear market, Chinese citizens began buying physical gold in droves, pushing the nation past India as the world's largest gold consumer in 2013. But then, an anti-corruption drive by President Xi Jinping prompted fewer buyers to purchase gold bars, coins and jewellery, and imports fell.

Officially, all gold exported to China moves through Hong Kong

Many gold market observers do not believe the Hong Kong import numbers, and hold to the view that a lot of gold gets into China unreported. Officially, all gold exported to China moves through Hong Kong, although the country recently started allowing direct imports via Beijing. Sources say the move is a way to keep China's imports under the radar as it seeks to hoard gold to diversify away from U.S. Treasuries.

The country's gold reserves are officially put at 1,054 tonnes — a number officials haven't updated since 2009.

Gold makes up little more than 1% of the country's $3.6 trillion in reserves compared to more than 70% for the United States, which holds 8,166 tonnes of gold in vaults.

Gold price: ETF investors cash out

On Monday gold futures drifted lower for the fifth straight session in anticipation of an end to the US Federal Reserve's economic stimulus program, slipping back from a six-week high reached a week ago.

In afternoon trade on the Comex division of the New York Mercantile Exchange gold for December delivery was changing hands for $1,225.30 an ounce, down $6.50 from Friday's close.

The gold market has been unpredictable this month, hitting a high of $1,255 an ounce last Tuesday after a sharp recovery from the 2014 sub-$1,200 low early in October.

Most large investors and retail buyers have been selling into the rally and the latest weekly data show holdings of exchange traded funds backed by physical gold falling to the lowest in over five years.

Net sales of 13 tonnes took total holdings to 1,654.2 tonnes, the emptiest vaults have been since September 2009 when gold was trading below $1,000. Gold bullion holdings hit a record 2,632 tonnes or 93 million ounces in December 2012.

Expectations for a continued rally in the dollar, the ending of QE in the US this week and a general benign outlook for inflation have left many investors in doubt about current upside potential

Ole Hansen, chief commodity strategist at Denmark's Saxo Bank says "the expectations for a continued rally in the dollar, the ending of QE in the US this week and a benign outlook for inflation have left many investors in doubt about the current upside potential for gold."

In the run up to gold's attempt to break resistance at $1,255 on Tuesday last week speculators in gold futures and options turned more bullish.

Bullish bets on gold – net long positions held by large investors like hedge funds – jumped some 30% in the week to October 21 according to Commodity Futures Trading Commission data.

It was the second time in ten weeks hedge funds added to their bullish positioning after falling to the lowest level this year early October.

On a net basis hedge funds held 75,273 gold lots or 7.5 million ounces, still almost half the year high of 14.4 million ounces.

Difference Between The 2% Mindset & 98% of the Population. 900th Post of Metal Forex Trader

Sacrificing happiness for comfort

Whoischick.com points out the fact that we can choose to be in two areas in our everyday life: the comfort zone or discomfort zone.

1. Comfort zone: 98% of us are being like everyone else. We live with insecurity, fear and regret. We procrastinate, play it safe, settle for less and lead a dull life. Most of the time we are just surviving or getting by.

2. Discomfort zone: Only 2% of the population are living their dreams. They have chosen happiness and living without limits. They have confidence, dare to explore new things, embrace the unknown and act in spite of fear. They are looking for changes, excitement, abundance and fulfillment. They believe in getting the most out of life.

What about you? Are you living the life you really like? Do you have the guts to live the life you always want?


A comfort zone does not equal to a safe zone

But this is easier said than done.

Everybody wants the freedom to do the things they like. But the moment you stop tolling all day in the office, how do you pay the bills at the end of the month? Who is going to support your family? How can you save for your retirement?

You can choose to stay in your comfort zone. But a comfort zone is not necessarily a safe zone. Company downsizing and retrenchment sometimes have nothing to do with whether you have met your KPIs or sales quota, how much past contributions you have made, or how serious your OGIM symptoms are.

Facing regular restructuring announcements in my corporate life, it was imminent for me to have a contingency plan. My Plan B was buying some good properties that could continuously generate passive income for me. If one day my name was in that batch of employees to let go, my tenants would help to pay my bills.

I also started researching about possible ways to achieve financial freedom. It is not about not having to work at all, but more about the freedom of choosing to do the type of work I enjoy, the liberty to spend my time the way I prefer, etc.

Throughout the years, I have seen many people who try different ways to realize their dream of being financially free. Some work while some flop.


Financial freedom: what don’t work

Some people may claim that they ‘have been there’. However, if their financial freedom is not sustainable, and they eventually go back to where they were, I won’t call that a proven strategy at all. These methods include:

1. Following any get-rich-quick program that guarantees to make you a millionaire but sounds too good to be true.

2. Joining any high risk ponzi investment scheme that promises high return in a short period of time. No such scheme can stand the test of time in our past history.

3. Winning the lottery, striking the jackpot or reaping a windfall at the casino that you will quickly spend or lose them all and go back to square one in no time.

4. Receiving a sudden big inheritance or donation with no prior training in personal financial management or investment. Think the woman who spent her $1 million donation after the horrible accident of her husband, all in barely one year’s time.


Financial freedom: what work

Below are three proven methods to achieve financial freedom that I have found to be sustainable in the long term.

1. Investing in good stocks or good properties that becomes a stable stream of income in terms of dividends or rental return, and promises a sizable capital gain when cashing out one day.

2. Building a solid and sustainable business that offers a reliable source of income in the long term.

3. Having a wealthy spouse who has high earning power or the financial means to support your lifestyle, and is generous to you (note: to you only).

It is good to be able to achieve one of the above. But it is best to attain all of them if you know what I mean!

Will the Fed turn off the QE tap? We'll find out Wednesday

Precious metals markets could be in for a wild ride this week, with the US Federal Reserve expected to wind down its third installment of quantitative easing. (QE)

The two-day Fed meeting starts Tuesday and at its conclusion, investors will know whether or not the central bank, led by chair Janet Yellen, will end the bond-purchase program that has been responsible for fuelling US stock markets, keeping interest rates low, and most important for mining – keeping the prices of precious metals buoyant since the program began in 2008.

Last December, on signs the US economy was moving out of recession and no longer needed as much economic stimulus, the Fed began winding down its monthly bond purchases from $85 billion, to its current $15 billion.

While an announcement to end QE would almost certainly be negative for gold and silver, and US equities that have become dependent on the low-interest-rate environment, there are signs that now may not be the best time to "take away the punch bowl" of cheap money. Fears of deflation, slowdowns in Europe and China are three of the biggest reasons for a possible continuation of QE. A raft of negative news this month has also roiled stock markets, ranging from unrest in Hong Kong to Iraq to Ebola.

Two weeks ago James Bullard, head of the St. Louis Fed, said the Federal Reserve should continue with asset purchases until the US economy shows more strength, telling Bloomberg TV: "We can go on pause on the taper at this juncture and wait until we see how the data shakes out in December."

The UK Observer pointed out that "midterm elections next month could see the Democrats lose control of the Senate and break an uneasy truce over economic policy. So the Fed may be only be a few meetings away from declaring that the US needs more QE and find itself delaying a rise in rates. More cheap money would cheer stock market investors."

Others at the Fed, however, think the central bank will stay the course. Boston Fed president Eric Rosengren suggested that when the Fed meets Oct. 28-29, it will likely end the program, unless US employment data looks poor enough for the Fed to consider changing its mind.

Whether or not the Federal Reserve chooses to continue easing, it seems almost certain that Europe will open its QE taps. 

"Figures next month are expected to show the eurozone contracting in the third quarter following stagnation in the second. Eventual ECB action looks inevitable," says the Observer. 

Earlier this month, the European Central Bank started purchasing French bonds in an attempt to revive the flagging eurozone.

The Fed has a habit of delaying difficult and market-moving decisions when it comes to QE. It certainly will be interesting to see which direction it decides to go and how the markets react.

On The Coming Collapse Of Copper

18 months ago we first brought the world's attention to the end of what has now been exposed as among the largest ponzi schemes in history - the Chinese Commodity Financing Deals (CCFDs) - pointing out how this meant commodities like copper were likely to come under pressure as firms liquidate what minimal holdings they had (and sell out futures hedges) to manage the risk of unwinds in these quasi-collateralized deals. Since then, copper prices have indeed plunged, as has global growth expectations and global bond yields as a realization that 'demand' implied by previous prices was entirely artificial. Now, as Goldman notes, the real world is catching up (or down) to the reality of mal-investment and how copper is set to drop notably further...

As Goldman Sach's Max Layton,

Metals and mining commodities – including the base and bulk commodities, steel and cement – are highly exposed to a slowdown in the Chinese property, with over 40% of Chinese demand for cement and copper in particular consumed in the construction sector. The recent slowdown in Chinese property sales, prices and early-cycle new starts has most impacted physical demand for (and sentiment towards) commodities exposed to the earlier stages of China’s construction cycle – steel and iron ore – which have underperformed commodities more exposed to latter stages of the construction cycle, such as copper.However, as the recent slowdown in new starts flows through to late-cycle, copper-intensive construction completions, we expect copper to come under further pressure.

Understanding the construction cycle and commodity demand

The property development timeline for a typical Chinese building (such as an apartment building) from new start to property completion takes around 18 to 24 months. An “early-cycle” construction phase can be characterized as a period with strong new starts, relatively weak completions, and falling inventories (associated with higher sales). Conversely, “late-cycle” construction phases are typically associated with weak new starts, relatively strong completions, and rising/and or high property inventories (associated with weak sales). The intensity of basic material consumption varies significantly across these phases: consumption of steel and steel-making raw material (such as iron ore and coking coal) tends to be strongest in the earlier stages, while copper tends to be consumed in the later stages.

Specifically, as much as c.61% of Chinese and c.25% of global copper consumption is related to Chinese housing and property activity. Of the c.61% of Chinese consumption that may be related to property, up to c.45-50% is directly associated with project completion (plumbing, wiring for lighting, local power infrastructure, telecom, etc.), and c.12% is associated with the actual property sale, when the property is fitted with copper-intensive consumer appliances and/or tiling intensive in mineral sands. The strong link between completions and copper demand owes to the fact that internal and external copper wiring (for connection to the grid) tends to be installed around project completion. There is strong empirical evidence for the relationship between completions strength and copper prices: using completions as the primary indicator of China’s copper demand, together with ex-China demand data, explains the vast bulk of variation in copper prices over the past decade.

Bad news for copper

In 2012/2013, the Chinese construction sector transitioned from an early-cycle construction phase to a late-cycle one, as completions surged following a wave of new stimulus-related construction post the Global Financial Crisis. Since then, the cycles have been relatively muted, with both new starts and completions growing sub-trend, for the most part. More specifically, the observed weak growth in new starts over the past two years has bearish medium-term implications for late-cycle copper-intensive construction completions. In our view, this weakness has not been priced in, as it has not flowed through to the physical market via higher inventories, and therefore supports our bearish copper view over the next year ($6,600/t and $6,200/t at 6- and 12-month horizons).

Double whammy (at the margin): commodity financing deals

In the past three years, China has increasingly employed complex commodity financing deals to import relatively low-cost US dollar funding, which in some cases has likely been used to fund property development. While the profitability of these financing deals has already fallen owing to lower Chinese interest rates, higher rates outside of China, and – in the case of copper – persistent LME backwardation, we expect a further gradual unwind in such deals over the course of 2015 as China opens up its capital account gradually over time. This broader reduction in financing deals, combined with an expected rise in US interest rates, could result in higher costs of funding for Chinese property developers, potentially further slowing property starts and property-related commodity consumption. At the same time, a further reduction in deals would reduce demand for copper imports into bonded warehouses in China (a key component of the financing transactions), potentially raising inventory visibility outside of China. This scenario would be a double whammy for copper, which is both highly exposed to the property sector and supported by low visible exchange stocks.

Demand concerns put pressure on base metals

The global base metals market is currently facing strong headwinds that impact price performance.

In 2012 and 2013, a combination of expanding liquidity, weakening dollar, China’s voracious appetite for consumption and slowly improving growth prospects helped a strong uptick in demand. 

Although selective, investor interest in base metals was healthy.

Things are different now. This year has not been a great one for metals market.

In recent months, some of the important drivers have reversed direction while new challenges have emerged. Shrinking liquidity following the US Fed’s tapering programme, a steadily firming dollar, slowing industrial production in some of the major economies and lower inflation expectations have combined to cap the upside and force market prices down.

Currently, macroeconomic risks are casting a shadow – concerns over growth being the most important.

There is apprehension of demand slowdown. As the mover and shaker of the world commodity market, China’s import and consumption of metals exert a profound impact.

With construction activity in the Asian major slowing, there are fresh concerns over metals’ demand growth.

Another reason is the high level of corporate debt in China.

Although inflation is under control and employment healthy, the Chinese government seems to be worried about corporate debt and has, therefore, asked State-owned enterprises to fund purchases through cash flow rather than on credit.

According to experts, the metals and mining sector in China is not in a good shape. Declining investment growth and falling property prices have generated fears that the 2015 GDP growth target may be lowered. 

There are demand concerns is other regions too. Although US recovery is back on track, global growth is still uneven. Demand in Europe and Japan is still fragile.

Of course, many emerging markets show signs of stabilising with activities being adjusted to global realities. The US Fed’s monetary policy normalisation is seen as another uncertainty as expectations differ about the timeframe. Geopolitical tensions may have somewhat receded, but the Russia-Ukraine stand-off and insurgency in Syria and Iraq can potentially create a turmoil.

Simply put, the global environment is full of strong pulls and pressures.

As a result, many commodities are trading close to their cost curve.

Some of the less-efficient producers have shut down. It has also prompted a cut in capacity expansion.

Collapsing metal prices deter fresh investment while investor risk appetite wanes.

Supply demand fundamentals have begun to assert themselves.

Exception

An exception to the general trend of falling base metals prices is nickel whose price surge has been triggered by Indonesian ban on export of unprocessed raw material. Zinc is another exception because of tightening supplies.

Despite all the uncertainties surrounding the base metals market, on current reckoning, nickel will turn out to be a winner next year followed at a distance by zinc.

thehindubusinessline.