China May Default on Copper Contracts Amid Shortage, Lawyer Says By Matthew Craze Bloomberg News Service Friday, November 18, 2005
http://quote.bloomberg.com/apps/news?pid=10000006&sid=a06N6xBoYZ.Q&refer=hom e LONDON -- China may default on money-losing copper trades because the country doesn't have enough of the metal to make good on delivery commitments next month, said Mark Topfer, the former No. 2 lawyer at the London Metal Exchange. China's obligations for copper deliveries into exchange-approved warehouses are "infinitely higher than the stock that exists," said Topfer, a senior associate director at law firm Norton Rose in London. He was the exchange's deputy general counsel until last year and advises LME brokers and customers. As much as 200,000 metric tons of copper must be delivered because of positions amassed by Liu Qibing, a trader for an affiliate of the National Development and Reform Commission, the top planning agency, the state-run China Daily said Nov. 17, citing an unidentified official. There are only about 140,000 tons of copper in global warehouses, Topfer said. 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 didn't answer e-mails or calls to his mobile and landline phones that day. A foreign media report that Liu is working for the State Reserve Bureau is fabricated, the China Daily said, citing the official. "They are denying that this person exists," said Topfer, who works in Norton Rose's financial markets division. "That seems to send the message that they're not delivering" on their commitments, he said in a telephone interview yesterday. 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 were not answered today. The positions are based on so-called short trades, in which 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 authorized to trade with the LME, according to David Cliffe, a spokesman for the U.K.'s Financial Services Authority in London, which regulates the exchange. China may incur losses of as much as $300 million, Wang Zheng, a trader at Shanghai Dalu Futures Co., said in a telephone interview from Shanghai yesterday. Copper has more than doubled in value since 2003, as surging demand for power cables and electrical wire in China expanded by more than 20 percent a year, draining global stockpiles to less than 100,000 tons, or less than three days of global demand. Official inventories total 140,374 tons at warehouses monitored by New York's Comex Exchange, the LME and the Shanghai Futures Exchange. China has been selling copper to ease prices. Copper touched records in New York and London yesterday amid speculation the country will have to return to the market to buy more metal. "The market is a strange and mysterious thing and China is still learning," billionaire Robert Friedland, the 32 percent owner of Ivanhoe Mines Ltd., which holds the Oyu Tolgoi copper and gold prospect in Mongolia, said by telephone from Beijing yesterday. "There's a tremendous shortage of copper." 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, Shanghai Dalu's Wang said. A rollover is when a position is closed and replaced with a similar one for a date further ahead, the LME says in its publication, "Managing Metals Price Risk." Copper for delivery in three months reached an all-time high of $4,185 a metric ton yesterday on the London Metal Exchange, taking its gain in the past 12 months to 38 percent. "The key is whether the state can really deliver on the 200,000-ton position in London," said Yuan Fang, a trader at Shanghai Dongya Futures Co, in a telephone interview yesterday. 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 a Sumitomo Corp. trader was cornering the copper market. The metal's rally in the past 12 months has echoes of the Sumitomo scandal, when trader Yasuo Hamanaka hoarded metal, sending copper up 69 percent in a year, said Threlkeld, president of Resolved Inc. in Scottsdale, Arizona. The SRB, not Liu, is responsible for any losses, said Topfer. "My sense is that it's the SRB ducking for cover," he said. "You don't get this short for this long."
