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Who Has Control Over a Crucial Source of the Copper Supply?

By Jim Williams

Can You Spare A Penny?

Multiple reports surfaced Monday claiming a single buyer has snapped up more than half the copper held in London Metal Exchange (LME) warehouses.

The Wall Street Journal is among the sources claiming the sole company responsible for buying up the supply is Red Kite Group, a London hedge-fund manager that focuses on metals trading. Whether it is Red Kite or not, someone has control over a crucial source of supply of the red metal.

On several occasions in the last month, this buyer – presumably, Red Kite, held as much as 90% of the world’s copper stored in LME-licensed warehouses – equaling about 140,000 tons. That’s about $535 to $850 million worth of copper at today’s prices – or, enough to make the copper parts of the Statue of Liberty more than 1,700 times!

Banks often hold large portions of the metal in LME-licensed warehouses on behalf of clients, but a hedge fund holding that much copper is less common, traders and brokers say. The London Metal Exchange, owned by Hong Kong Exchanges & Clearing Ltd., doesn’t limit how much metal a single trader may hold in its warehouses, and says that it has mechanisms in place to prevent market squeezes—a situation in which holders of a large share of the supplies use their position to jack up prices. For example, it requires a company with a dominant position to lend metal for short periods and it caps the amount of money that can be charged for that service.

Red Kite declined to comment.

A Penny For Your Thoughts?

Still, in the grand scheme of things, the amount of copper that Red Kite (again, presumably) holds is not the end all, be all of the copper market. 140,000 tons is just one-quarter of one percent of the copper that Freeport-McMoRan Copper & Gold (NYSE:FCX) has, although theirs is mostly in the ground.

Bottom line, the LME buyer – whoever that is – hasn’t cornered the copper market as a whole. However, experts suggests that if the holding is indicative of a positive copper price prediction by Red Kite, that’s worth taking note of, given those involved in the firm. Still, the large holding is unusual, and copper investors would be wise to keep an eye on ownership levels.

Copper up on strike action, weaker dollar

Taking a look at the markets to start the week – Copper rose on Monday on news of planned strike action in Indonesia and Peru and as the dollar fell following results of European bank health checks. Investors are not getting too excited. Monday’s gains were limited by an expected surge in supply of the metal next year.

Also helping copper were rumors that China’s State Reserve Board (SRB) has resumed purchasing copper. China consumes about 45 percent of the world’s copper.

The dollar fell versus the euro following the results of bank stress tests, though reaction was subdued by weakening German business morale data.

“The copper market is already positioned short so the risk now is for a bit of a rally into the year-end. Imports into China are rising and there’s better orders from the power sector,” said Gayle Berry, metals analyst at Jefferies. In the longer term, however, Berry said: “If copper gets near $7,000 people will sell because of the expected supply surge.”

Workers at Freeport-McMoRan Inc’s giant Indonesian copper mine will hold a one-month strike from next week, a union official said on Monday, after the company failed to make changes to local management following a fatal accident.

Also, workers at Peru’s biggest copper mine, Antamina, plan to begin an indefinite strike from Nov. 10 that will halt total output running at about 30,000 tons per month, a union leader told Reuters on Friday.

Reviewing LME Week

Overall the consensus at last week’s LME Week industry gathering in London was downbeat on copper. Metals Bulletin reported analysts from INTL FC Stone, CRU, Natixis, Citi and Noble Resources talked about copper at the event – telling those involved with the red metal that they are right to focus on an impending surplus of material. Rising output from new and existing mines is a major headwind that will keep prices pegged back throughout 2015, the analysts said at the LME Seminar.

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