Copper Rises to Record on Speculation China May Default on Wrong-Way Bets

(Bloomberg) -- Copper rose to records in London and New York on speculation the Chinese government doesn't have enough metal to make good on wrong-way bets made by one of its traders.
As much as 200,000 metric tons of copper must be delivered to international warehouses because of positions amassed by Liu Qibing, a trader for an affiliate of the National Development and Reform Commission, the state-run China Daily said yesterday, citing an unidentified official. There are about 140,000 tons of copper in publicly reported stockpiles worldwide.
``The funds piled in and pushed prices higher,'' said Angus Macmillan, an analyst in London at Prudential Bache, a member of the London Metal Exchange. ``It's physically impossible to deliver that metal anywhere. The government has basically increased nervousness in a market that was already nervous.''
Copper futures for December delivery rose 3.2 cents, or 1.6 percent, to $1.978 a pound on the Comex division of the New York Mercantile Exchange, the seventh straight record. Prices climbed 3.8 percent this week, the fifth straight advance.
Copper for delivery in three months on the LME rose $55, or 1.3 percent, to $4,200 a ton ($1.9048 a pound) after reaching a record $4,243. Prices on the Shanghai Futures Exchange fell 0.5 percent.
Unprecedented statements by China on sales of copper from its inventories this week have failed to convince investors the nation can honor Liu's bets. The country, the biggest consumer of the metal, may have losses of as much as $300 million, according to Wang Zheng, a trader at Shanghai Dalu Futures Co.
`Infinitely Higher'
China may default on the trades, Mark Topfer, the former No. 2 lawyer at the LME, said in an interview yesterday. The country's delivery obligations are ``infinitely higher than the stock that exists'' in exchange-approved warehouses, he said.
Topfer, who works in Norton Rose's financial markets division in London, was the LME's deputy general counsel until last year and advises brokers and customers.
The Beijing-based State Reserve Bureau, to which Liu was affiliated, may be the second Chinese state-controlled organization to get into trouble in a year. In November last year, China Aviation Oil (Singapore) Corp. sought protection from creditors after it ran up $555 million of debt from trading oil derivatives. The company bet prices would fall. They have risen to a record.
Copper's 36 percent rally in the past 12 months also has echoes of the Sumitomo Corp. scandal, when trader Yasuo Hamanaka hoarded metal, sending copper up 69 percent in a year. Hamanaka admitted in 1996 to unauthorized copper trades that lost the Japanese company $2.6 billion. He was jailed.
Copper inventory of 141,852 tons, equal to about three days of global usage, is stored in warehouses monitored by the LME and commodity exchanges in New York and Shanghai, according to data compiled by Bloomberg.
`Personal Actions'
Liu built up so-called short positions, betting copper prices would fall, China Daily reported, citing an unnamed official at government stockpile agency the State Reserve Bureau.
``As far as I know, the loss was a result of his personal actions, instead of the government,'' China Daily cited the official as saying.
The National Control Center for Supplies Reserve, under the State Reserve Bureau, declined to comment today when contacted by Bloomberg. No one answered calls made to Liu's mobile phone.
``The blame is going to be tossed back and forth until it lands on someone's lap,'' said Michael Guido, marketing manager for hedge funds at Societe Generale in New York. ``When it comes down to the deadline, somebody has to pay.''
Liu hasn't been at work since last month, two people at companies that traded with him told Bloomberg Nov. 15, declining to be identified. He hasn't answered e-mails or calls to his cell and landline phones.
`Eight Brokers'
The LME, the world's biggest metals exchange, may employ its special committee to settle a dispute between China and as many as eight brokers who have done business with Liu if the State Reserve Bureau, or SRB, reneges on the positions, Topfer said.
Adam Robinson, an LME spokesman based in London, declined to comment yesterday. Calls to the SRB spokesman in Beijing weren't answered today.
By building a short position, a speculator enters a contract pledging to deliver a commodity by a specific date at a preset price. The bet is that prices will fall so that delivery can be made with supplies that are cheaper than when the contract was sold.
Liu isn't registered with the U.K.'s Financial Services Authority in London, which regulates the LME, FSA spokesman David Cliffe said yesterday. The FSA is ``monitoring'' the copper market, Cliffe said today.
Production Shortfall
Copper has more than doubled since 2003 as production failed to meet demand. The shortfall in output this year will be 343,000 tons, Standard Bank in London forecast in a Nov. 1 report.
China has been announcing sales of copper to ease prices. The SRB plans to sell 20,000 tons on Nov. 23, the National Development and Reform Commission said Nov. 16. It sold the same amount on the day of the announcement.
The SRB may be selling copper to roll over some of its contracts that are scheduled for delivery in December, Wang said. A rollover is when a position is closed and replaced with a similar one for a date further ahead.
Speculation that the SRB may get government approval to export 200,000 tons of copper to meet the obligations has circulated in the Shanghai market, the China Daily said today. The SRB has declined to comment.
Prices for copper may rise another 9 percent this year, before falling in 2006, as China is forced to make good on the bets, said David Threlkeld, the first man to publicly allege in 1991 that Hamanaka was cornering the copper market. Threlkeld is president of Resolved Inc. in Scottsdale, Arizona.
Liu's current whereabouts are unknown.

To contact the reporters on this story:
Matthew Craze in London at mcraze@bloomberg.net;
Simon Casey in London at scasey4@bloomberg.net