Sell! Buy! Hide!

The mining and metals business tends to get more and more opaque the further downstream you go. So when the name of an individual metals trader hits the front pages of the financial press, you know something, somewhere has gone terribly wrong and big money is changing hands.

The latest, suddenly famous metals trader is Liu Qibing, or “Mr. Bai Hai.” Liu, in his late 30s, worked as the deputy chief of the import and export division of the State Regulation Centre of Supply Reserves. This is the agency that trades metal for the Chinese government’s State Reserves Bureau (SRB), which is housed on the 21st floor of the Guohong building in western Beijing. Both the centre and the bureau operate under the National Development and Reform Commission, the national government’s central planning agency.

Reports suggest Liu took short positions equal to 100,000 to 200,000 tonnes of copper in July and August, possibly on the London Metal Exchange (LME), with the bureau obliged to deliver by December 21.

However, copper prices have risen steeply since the summer on strong fundamentals, and some have guessed that the SRB’s paper losses on these short positions may now well exceed US$100 million.

Adding to the mystery is that trader Liu hasn’t been seen or heard from since late September.

As the scandal first broke, in typical communist style, the SRB denied that Liu was ever an employee, but the story has since changed to Liu either being on a leave of absence or held in police custody.

At presstime, the SRB was publicly stating that it did not know Liu’s whereabouts, and that, in his controversial trades, Liu had been acting on his own and not with the bureau’s authorization.

The difficulty of one market participant quickly delivering up to 200,000 tonnes of physical copper (about a year’s output from a large Chilean copper mine) becomes clear when you look at the current low level of copper stocks now sitting in LME-registered warehouses around the world: On November 21, LME copper stocks stood at 66,325 tonnes, up 2,525 from the previous trading day as 3,000 tonnes of metal was deposited into an LME-registered warehouse in the South Korean port city of Busan.

On news of Liu’s “rogue” trading, the LME’s official cash bid for copper surged another 3%, peaking on November 21 at a record US$4,381 per tonne, a penny shy of US$2 per lb.

At the same time, there has been steep backwardation, with the 3-month bid at US$4,183 per tonne. Further out in time, the gap has been even wider — up to a US$1,000 discount for delivery in December 2007 — prompting some to suggest the SRB has been buying copper in the near term and selling it in the future.

All told, copper prices have risen 34% this year, after rising 37% last year.

The SRB responded to its apparent conundrum with its first-ever disclosure of its strategic copper stockpile, which it says amounts to 1.3 million tonnes of copper — some 1 million tonnes higher than many observers had previously estimated.

Next, in mid-November, the SRB sold 20,000 tonnes of copper from its stockpile, and stated it would sell another 20,000 tonnes soon. Many in the market now expect an auction of a third 20,000-tonne consignment.

(Barclays Capital has noted that copper imports to China dropped about 35% in October to around 65,000 tonnes, with local market participants perhaps already expecting releases from the SRB stockpile.)

If the SRB copper stockpile is indeed as large as 1.3 million tonnes and can be relatively easily mobilized, it will cost the SRB only a few million dollars in shipping costs to deliver physical metal to meet its obligations, rather than the US$100-300 million it would cost to close out the short positions with cash.

There are already reports of copper being shipped to Shanghai from all over China in preparation of delivery into the short position.

By disclosing its inventory and announcing such sales, the Chinese government seems to be succeeding in reassuring investors that it is now a mature player in the metals markets and that it can be relied upon to meet its trading obligations.

But the contrarian school of thought — that the Chinese are not short copper at all, and have only manufactured the rumours in order to drive up prices and unload some of their large copper stockpile — is still out there. If this is the case, surely Liu will re-emerge from his hiding place not humbled and in cuffs, but with a broad smile and a promotion.

While the above scenario may be completely false, the fact it’s being entertained by some traders does show that many are still uncertain where exactly the Chinese government stands in the copper market.

It hasn’t been long since the Chinese government last tripped up in the commodities market. Just a year ago, Chinese state-owned China Aviation Oil (Singapore) Corp. filed for creditor protection after running up a US$555-million debt by trading oil derivatives, betting that oil prices would fall when, in fact, they rose to record highs.

In 1994, the Shanghai office of CITIC (China International Trust and Investment Corp.) ran up debts of US$40 million through unauthorized trading of LME copper, resulting in the arrest of four staff and the subsequent jailing of the key figure in the scandal, Chen Tongsheng.

Yet, all of this is small potatoes, of course, to the US$1.8-billion loss racked up by the notorious “Mr. Copper” Yasuo Hamanaka, who kept his burgeoning losses hidden from his employer, Sumitomo, for 10 years before the deceit broke publicly in 1996.