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Cinnamon

Banks Face Vast Losses In Copper Mayhem

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source: http://www.telegraph.co.uk/money/main.jhtm...13/cncopp13.xml

Banks face vast losses in copper mayhem

By Ambrose Evans-Pritchard (Filed: 13/05/2006)

The spike in copper prices over recent weeks has left a group of banks and operators on the London Metal Exchange (LME) nursing vast losses, raising concerns about the stability of the commodities market.

The banks have been caught out by a sudden widening in the gap between the price of three-month futures and that of long-term futures, for December 2010 or April 2011.

"The dramatic differential we have seen over the past six weeks has cost them a huge amount of money," said a market source. "The bigger players can absorb the losses but smaller operators have nowhere to hide."

Copper surged this week to an all-time high of $8,875 a tonne, rising almost 10pc on Thursday. Yet futures prices for April 2011 are just $3,778 a tonne.

Barclays Capital denied reports that it faced losses of £500m on copper trades, saying that it would have issued a statement if such claims were true.

Banks help to finance the LME's $3,000bn trades each year, often taking on long-term hedges from metal producers, which they cover by selling short-term futures. If the two suddenly diverge, it plays havoc with their books.

Adding to the intrigue, the LME's chief executive, Simon Heale, unexpectedly said on Thursday that he would be stepping down by the end of the year. His spokesman denied that there was any link to the metals mayhem this week, insisting that

Mr Heale wished to spend more time with his family.

Copper has doubled in price this year even though industrial demand is flat.

"This is fairyland," said Richard Elman, head of the Noble Group. "We have never seen such a disconnect between reality and pricing

of raw materials. The long-term story is sound but the short-term froth is patently frightening."

William Adams, an analyst at BaseMetals.com, said demand for copper tubes was collapsing as producers switched to PVC plastics. The market in Germany has halved from 90,000 to 45,000 tonnes. "There's a very rapid switch from copper. When it turns, copper could easily drop $1,000 a tonne in one day," he said.

David Threlkeld, a veteran copper trader, said the market had been "out of control" for months, allowing speculators to run roughshod over industrial producers and users. "The LME has been seduced by hedge funds, [which have] pushed prices to levels unsupported by fundamentals. There's a vacuum below and the crash could set off a chain of margin calls running through the whole commodities sector. We've got a crisis on our hands and it is a lot bigger than copper," he said.

-------------------------------------------------------------------------

"There's a vacuum below and the crash could set off a chain of margin calls running through the whole commodities sector. "

I have a shade of an idea what this could possibly mean, but if someone can explain this scenario, I'd be grateful.

Edited by Cinnamon

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"There's a vacuum below and the crash could set off a chain of margin calls running through the whole commodities sector. "

I have a shade of an idea what this could possibly mean, but if someone can explain this scenario, I'd be grateful.

He's saying that the current prices are driven purely by speculation & the actual base price that end users of the commodity in question are willing to pay is much lower. The demand destruction in copper use caused by the high prices as copper piping users switch to PVC piping is given as evidence for this.

Hence there's a gap in the demand curve between the prices the speculators are (currently) betting on and the prices the end users are willing to pay -- if the speculators try to exit the market the price is likely to fall dramatically, since it has no other support.

These large falls could cause margin calls on deriviative trades which were predicated on the higher prices -- in order to cut their losses, the holders of the deriviatves will sell out, causing the market price to drop even lower, which will trigger further margin calls in a descending chain of destruction, as each margin stop point is reached & yet more margin calls are made on the next set of deriviative trades.

cheers, Phil

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David Threlkeld, a veteran copper trader, said the market had been "out of control" for months, allowing speculators to run roughshod over industrial producers and users.

Well duh, what do you think happens when you throw vast trillions of dollars of cheap credit into the global economy? All that bloody money has to go somewhere.

These large falls could cause margin calls on deriviative trades which were predicated on the higher prices -- in order to cut their losses, the holders of the deriviatves will sell out, causing the market price to drop even lower, which will trigger further margin calls in a descending chain of destruction, as each margin stop point is reached & yet more margin calls are made on the next set of deriviative trades.

Sounds like fun. Maybe I should be buying more gold before my bank goes bust...

Edited by MarkG

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The demand destruction in copper use caused by the high prices as copper piping users switch to PVC piping is given as evidence for this.

This will help keep up demand for oil then?

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Well duh, what do you think happens when you throw vast trillions of dollars of cheap credit into the global economy? All that bloody money has to go somewhere.

Sounds like fun. Maybe I should be buying more gold before my bank goes bust...

Or start hoarding cash and Gov't bonds?

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I assume these copper options will be exercised and this will filter into inflation at some point in the future?

It's US that will be picking up the tab for this one several years down the line...

Edited by dnd

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source: http://www.telegraph.co.uk/money/main.jhtm...13/cncopp13.xml

Banks face vast losses in copper mayhem

By Ambrose Evans-Pritchard (Filed: 13/05/2006)

The spike in copper prices over recent weeks has left a group of banks and operators on the London Metal Exchange (LME) nursing vast losses, raising concerns about the stability of the commodities market.

The banks have been caught out by a sudden widening in the gap between the price of three-month futures and that of long-term futures, for December 2010 or April 2011.

"The dramatic differential we have seen over the past six weeks has cost them a huge amount of money," said a market source. "The bigger players can absorb the losses but smaller operators have nowhere to hide."

Copper surged this week to an all-time high of $8,875 a tonne, rising almost 10pc on Thursday. Yet futures prices for April 2011 are just $3,778 a tonne.

Barclays Capital denied reports that it faced losses of £500m on copper trades, saying that it would have issued a statement if such claims were true.

Banks help to finance the LME's $3,000bn trades each year, often taking on long-term hedges from metal producers, which they cover by selling short-term futures. If the two suddenly diverge, it plays havoc with their books.

Adding to the intrigue, the LME's chief executive, Simon Heale, unexpectedly said on Thursday that he would be stepping down by the end of the year. His spokesman denied that there was any link to the metals mayhem this week, insisting that

Mr Heale wished to spend more time with his family.

Copper has doubled in price this year even though industrial demand is flat.

"This is fairyland," said Richard Elman, head of the Noble Group. "We have never seen such a disconnect between reality and pricing

of raw materials. The long-term story is sound but the short-term froth is patently frightening."

William Adams, an analyst at BaseMetals.com, said demand for copper tubes was collapsing as producers switched to PVC plastics. The market in Germany has halved from 90,000 to 45,000 tonnes. "There's a very rapid switch from copper. When it turns, copper could easily drop $1,000 a tonne in one day," he said.

David Threlkeld, a veteran copper trader, said the market had been "out of control" for months, allowing speculators to run roughshod over industrial producers and users. "The LME has been seduced by hedge funds, [which have] pushed prices to levels unsupported by fundamentals. There's a vacuum below and the crash could set off a chain of margin calls running through the whole commodities sector. We've got a crisis on our hands and it is a lot bigger than copper," he said.

The banks are getting shafted. Boo hoo.

Welcome to the Internet age Mr Bank Manager - informed consumers in control of their own portfolios must be a hard pill to swallow.

Love this bit -

William Adams, an analyst at BaseMetals.com, said demand for copper tubes was collapsing as producers switched to PVC plastics.

Cant wait for all those electronics flooding in from China....

I Might MEW and buy one of those flat screen TVs with the PVC circut boards to celebrate..... :lol::lol::lol::lol:

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This will help keep up demand for oil then?

I did my bit to lower the copper price at the weekend by replumbing my bathroom in plastic piping. :lol:

The price actually never really came into it. I used plastic in an attempt to cope with the mess that is my floor and joists courtesy of the 'experts' in the plumbing trade.

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Very sensationalistic reporting... but that is the last we will hear of it, I reckon

I tend to agree.I am long-term bullish on commodities,mainly down to demand in india and asia.

these regions are still in infrastucture-building mode and will still be for the next 10 years.considering that's all the framework for 2 BILLION people that's a lot of roads,railways,cars,trucks,schools,hospitals,business premesis etc etc to be built,not to mention the cheap tat they will be selling to us,and also each other(in increasing quantities)

A bit of a blow-off at this stage is very good news.worth keeping an eye on,this could turn into an excellent buying opportunity.

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Very sensationalistic reporting... but that is the last we will hear of it, I reckon

I'm not so sure. I think there is huge counterparty credit risk right now and I would not be surprised to see a broker blow up due to margin calls, whether a bank will be badly hit is another question.

JY

The risk of defaults was hanging over the London Metal Exchange last night after a clutch of clients failed to meet margin calls on losing copper trades, leaving brokers struggling frantically to match their books.

The liquidity crunch follows another day of wild gyrations at the exchange, where copper, aluminium, zinc and lead all tumbled on bad US inflation data after failing to conquer new highs.

Copper fell 3.3pc to $8,080 a tonne in late trading. "The hedge books of the banks are seriously underwater on copper, but apart from that there are now brokers in trouble because clients can't meet the margin payments," said a market source.

LME brokers are liable for the margin calls of their clients, who are given 24 hours to stump up the cash. "Some of the wire cable manufacturers and industrial users can't meet payments because of cash flow problems, so the brokers are left holding the bag," he said.

He added that the banks were bleeding heavily because of a mismatch between their short-term and long-term futures contracts.

The market reached fever point late last week with all-time highs across the spectrum of base metals, led by an explosive spike in copper to almost $8,900 a tonne - up 170pc in a year.

Speculation by hedge funds prompted LCH.Clearnet to raise margin calls 71pc to $25,000 per 25-tonne lot earlier this week, after doubling them just eight days earlier.

LCH.Clearnet said that none of its 39 LME members had missed payments, but it is not responsible for monitoring defaults by broker clients. Moreover, many smaller players are outside the Clearnet system.

The LME said all its members were meeting obligations and are in "good standing". "There is no chance of a member defaulting because systemic risk is managed through very sophisticated mechanisms," it said.

Edited by JustYield

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