Copper's Crowd of Bears Punished by Trader Squeezing the Market

Updated on
  • A single company held up to half the metal in LME warehouses
  • Fees to roll forward short bets jumped to highest in 3 years

There were so many people shorting the copper market that one or two traders made them pay for it.

One company is hoarding as much as half the copper available in warehouses tracked by the London Metal Exchange. With that much metal under control, the trader can help drive up the fees associated with rolling forward a short position, making it tougher for speculators to keep their bearish bets. This week, the cost jumped to the highest in three years.

The episode, which caught traders by surprise this week, is one example of the perils of trading on the London Metal Exchange, where contracts are physically settled and speculators can end up paying dearly if they leave their bets without an offsetting position. Money managers are holding a net-short position on the LME, with prices down 23 percent in the past year and no sign of a recovery in Chinese demand.

“A big trader is probably trying to squeeze the market," said Gianclaudio Torlizzi, the managing director of T-Commodity srl, a Milan-based consultancy.“It’s an indication the supply side in copper is tightening."

Yesterday was the third Wednesday of the month, when many traders settle their commitments.

To renew a short position, traders have to buy back metal while selling it forward. The tom-next spread, a measure of how much the process costs over one day, jumped as high as $30 a metric ton on Tuesday, the highest since May 2012. The spread switched to a discount on Wednesday.

One problem for bears is that the amount of metal available in warehouses has dropped more than 40 percent since August. An unidentified company is controlling a large portion of that. Traders moved metal outside LME depots after a gap between London and Shanghai prices encouraged shipments to China.

Two firms held 40 to 49 percent of copper inventories and short-dated positions, according to Jan. 19 exchange data that shows holdings as a proportion of available stockpiles. While the LME provides data on the approximate size of large positions, it doesn’t disclose who is behind them.

Copper for delivery in three months has declined 7.3 percent this month to $4,360 a ton on the LME. It touched the lowest since 2009 last week.

(Updates LME holdings in eighth paragraph.)
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