Copper

Just as Blythe Masters' (yes, that one) team suffered huge trading losses in the middle of 2010 following the abysmal RBS Sempra purchase, showing that when traders of scale lose, they lose big, so today another big commodities trader, Barclays, is reported to have gotten crushed on copper and other base metals bets gone wrong. Dow Jones says that Barclays is set to reshuffle its base metals trading team following a series of significant financial losses made by the desk this year. "The base metals trading team is run by Iain MacRae, who is currently still working at Barcap. The company has been unravelling a number of its copper positions recently, traders and brokers said, along with positions in other base metals it trades. The majority of the losses were in forward copper spreads, people familiar with the matter said. Although these positions were in-the-money a year ago, the market has since gone in the other direction, forcing Barclays to close the positions out at significant loss, these people added....The investment banking division of Barclays Bank, Barclays Capital has been a category one ring dealing member of the London Metal Exchange since May 1997 and is traditionally a high volume participant in base metals futures and options trading. It also owns a 2.3% stake in the LME." As to who the most likely beneficiary of this collapse is Goldman, which in tried and true fashion told its clients to be buying copper throughout the carnage, only to close its copper position at a 20% loss a few days ago. But not before indicating that even more bloodbathing is in store for the future, having concurrently reopened future bullish positions in copper.

We thought we had seen it all. And then comes Goldman. The firm, which continues to eviscerate its clients, just closed its Long Copper and Zinc June 2012 trades at massive losses: the first was opened on May 23 at $8,804/t, and closed on December 19 at $7,274/t, for a loss of $1,530/t, the second opened May 23 at $2,189/t, closed on December 19 at $1,891/t, for a loss of $298/t. So far so good - as all our readers know by now, one should do what Goldman does (i.e., sells to "clients"), not what Goldman tells its clients to do. This is not surprising. What however, is hilarious is that in the same report that Goldman closes its June 2012 Cu/Zn longs, it also... opens Cu/Zn longs. That's right - "While we maintain our bullish views on copper and zinc into 2012, we close out our May 23 recommendations for these metals at a considerable loss, and resetting the recommendations at December 19 prices." So somehow, while losing clients up to a blended 15%, Goldman continues holding the feet of those who still listen to them to the fire. Because this time it will be different.

Last week we pointed out some curious observations from Fortress on commodities and the state of the Chinese market courtesy of secondary industrial metals, notably steel: "The investment landscape for industrial metals is becoming increasingly more difficult to navigate. As highlighted in last month’s letter, we are continuing to see a rapid deceleration of growth in China, specifically within the cyclical industries. A recent trip to visit steel companies outside Beijing underlined the impact of extremely tight liquidity and continued restrictive policy in the Chinese housing market. Steel capacity cuts – through idling or accelerated maintenance outages – are now commonplace and the speed of these cuts has certainly surprised the market. Construction is the principal end-market blamed for this weakness; given the very large inventory overhang and the continued lack of liquidity, this is not surprising. In our equity universe, we have also seen numerous companies expressing concerns regarding China construction demand. Zoomlion, China’s second largest construction machinery company, recently said, "Demand for construction  machinery has shrunken drastically and growth will no doubt continue to slow next year." Within the context of declining housing starts, plummeting transaction volumes and the beginning of a meaningful move down in housing prices, these shifts in the steel market have been an interesting harbinger of more substantial problems in the Chinese economy. Our principal concern is the extension of housing weakness into the banking system through the mechanism of both failing developers as well as the opaque and informal lending. We are concerned that the recent strength in iron ore, steel and copper has been misinterpreted by the market. In our view, any suggestion that the Chinese market is undergoing a substantial restock is misplaced." Today, we get a confirmation of just this warning courtesy of Citigroup which has charted weekly Iron Ore China port inventories and of broad steel inventories. Needless to say, domestic steelmakers, who better than anyone know the state of domestic end product demand, have seen the writing on the wall, and have one message for the world: short Brazil and Australia.

As if the ES futures were not enough to satisfy the thirst of those seeking incredulities today, Copper - the oft-watched indicator of all that is good in the world for every Keynesian economist - has just smashed all previous records for its largest rise in a week. At over six standard deviations this is the biggest move ever and whether efficient market followers or Trichet stability hypothesis worshipers, this week's rip-fest must surely 'help' all those industrials in the world with their resource planning for the coming year/month/week/hour.

Presented with little comment - aside from a snark nod to Trichet's much-heralded price-stability platform - Copper (at current levels) looks set to make its largest two-day rally since MAR09 with a shift well over three standard deviations from long-run means. Its hard to comprehend a higher USD and still falling SHCOMP along with the perspective that China is a little hot and may need more tightening with this ramp-fest, but then again applying sense to these markets is now nonsense anyway.

In a piece of news that can not be taken well by students of Dr. Copper, the FT reveals for the first time that China's estimated copper inventories, based on numbers from the China Non-Ferrous Metals Industry Association, were 1.9 million tonnes at the end of 2010 which is almost double the lower end of the consensus estimate of 1.0-1.5 MM tonnes (and, as the FT points out, "more than the US consumes in a year). So while copper is doing its high beta thing on the n^th short squeeze day in stocks, the smart money is starting to bail for very obvious reasons. And if the reasons are not obvious, this means that "The estimates, which were announced at a recent meeting of the International Copper Study Group but have not been made public, imply that real Chinese copper demand may have been lower than thought in recent years." In other words, and to all who are still confused by why Zero Hedge jokes at each and every iteration of economic growth driven by "inventory stockpiling", this is nothing other than trying to do at the national level, what Goldman and JPM do at the LME level each and every day: hoard and sell, only in China's case it is more hoard and forget. Alas, when China itself is the only real marginal buyer (not to mention that millions of domestic businesses operate using Letters of Credit backed by copper), things get very, very ugly, and explains why China has been so secretive about this number.

It appears the US has decided to apply a scorched earth policy to China. While we are seeing flashing headlines that the Senate just passed a China currency bill 79 to 19 (we don't know what is in the bill yet), we doubt it will be something that China will be too pleased with, as most likely there will be some language about currency manipulation and/or some such typical politician propaganda. What is more troubling is that the CME just made sure the tens if not hundreds of billions of Chinese copper collateralized Letters of Credit just lost even more value following yet another margin hike in Copper, which raised initial and maintenance margins by 15%. If China perceives US actions as provocative (and it made very clear that US overtures in Taiwan already are), we may just see an 'oopsie' moment tomorrow when the Mainland decides to offload a few billions in US Treasurys. And the cherry on top was a 28.6% margin hike in Platinum: a direct warning to gold and silver longs once again.

People are freaking out that gold has fallen to $1,650, from its lofty highs above $1,800—they are freaking out something awful. “Gold has fallen 10%! The world is coming to an end!!!” I myself took a shellacking in gold—...—but copper is what has me worried. Copper fell from $4.20 to $3.25—close to 25%—in about three weeks. Most of that tumble has happened in the last ten days, and what’s worrisome is that, as I write these words over the weekend, there is every indication that copper will continue its free fall come Monday.  From the numbers that I’m seeing—and from the historical fact that copper tends to fall roughly 40% from peak to trough during an American recession—there is every indication that copper could reach $2.67 in short order. And even bottom out below that—say at $2.20—before stabilizing around the $2.67 level.  But we’ll see. The price of copper is not the point of this discussion. The point of this discussion is what the price of copper means. What it means for monetary policy.

And there you have it: CME just hiked gold margins by 21%, silver by 16% and copper by 18%. Mystery solved.

Put this in the category of it ain’t over until it is over.

Dr. Copper, that metal with a Ph. D.  in economics, isn’t looking so hot.  In fact, it is at a reasonable risk of breaking down thus highlighting the current risks in the global economy.

They call the red metal “Dr. Copper” because of its uncanny ability to forecast the future direction of the global economy. Well, this year, he has been right again. The sudden sell off in crude has also created some spill over selling in other hard assets. That the long term case for copper is still compelling. (CU), (FCX).

Following various outright margin hikes in commodities such as precious metals and crude, the CME is now moving on to swaps and other interproduct and intraproduct contract pairs. As of a few minutes ago, the CME just hiked the CL intraproduct spreads Tier 1 through 6 for both New and Initial Margins by about 33.3%, and assorted other CL pairings by a lower amount. It also did the same for a variety of RBOB contract intraproduct spreads by a comparable amount. Curiously, intercommodity spreads actually declined between gold, silver and copper pairings by anywhere from 10% and 20%. For now the market appears not to be reacting to this latest margin move by the CME.