COMMODITIES IN TURMOIL - Copper hit by PVC and Hedge Funds

Simon Heale CEO of the London Metal Exchange (LME)announced he was stepping down by the year end on Thursday saying he wished to spend more time with his family.

There is major concern at the mayhem in the metal markets which is said to have left a banks and operators on the LME with huge trading losses. The stability of the market has been called into question where Copper soared to an all-time high yesterday of $8,875 a tonne. Yet futures prices for April 2011 are just $3,778 a tonne.Backwardation BIG, BIG style.

The principal cause has been the way banks have been stuck between this rock of price of three-month futures and the rock of that of long-term futures, for December 2010 or April 2011.

Banks provide the finance that finances the LME annual £3,000 Bn.s of trades, they have absorbed long-term hedges from metal producers, which the conventional practice has been to cover by selling short-term futures. Luvvly jubbly in an orderly market.Whilst industrial demand for copper is fairly steady the market price has doubled, a major disjunction which has the potential to be frightening as users , say move from copper plumbing pipes to PVC.

Commentators blame hedge funds who have pushed prices to levels unsupported by market fundamentals.If this gap between the industrial market market reality and the market snaps it would set off a chain of margin calls throughout the whole commodities sector.... whose ripples would spread throughout world stock markets.

John Moore of ABN Amro said "“It would not be scaremongering to expect the spot price to cascade in short order by 40 per cent before buying support re-emerges,” he said. “This poses an immediate risk to pure copper exposed mining shares.”... but he said that on January 3rd

OTHER MARKET FACTORS

The market is still waiting to see what the Chapter 11 action by Refco (now de-listed) in October last year - after it was discovered that British born Phil Bennet CEO of an unregulated subsidiary is accused of hiding the fact that Refco Capital Markets owed $430m to its parent company through a series of undisclosed transactions.He faces up to 20 years in jail for securities fraud.


Warren Buffet told his investors at their AGM on 6th May that noting "something like copper is speculative on both sides of the market--you are looking at market that's responding more to speculative than fundamental forces."

Buffett bought 129.7 million ounces of silver ounces— a fifth of the world’s mine supply — at $6 an ounce in 1998. New York-based CPM Group, a metals consulting firm, had estimated earlier this year that he still held between 100 and 129 million ounces of silver.

Buffet declared that "We had a lot of silver at one time, but we don't have it now."

A Lydford Penny, minted between 978 and 1016 AD, shows the head of Aethelred II, who was the Anglo-Saxon King of Wessex in that period. More info here about this beautiful object.

(Pic is not Mr Simon Heale - go to a lap dancing club and forget all about it - that's what most traders do)