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One Buyer Owns 90 Percent Of Copper Stocks On London Metal Exchange

First Posted: 12/14/10 03:03 PM ET Updated: 05/25/11 07:20 PM ET

London Metal Exchange

LONDON (By Michael Taylor and Pratima Desai) - U.S. investment bank JPMorgan said it does not hold more than 90 percent of copper stock warrants in London Metal Exchange warehouses, but declined on Tuesday to comment on whether it had a smaller position.

A single holder, recently controlling 50-80 percent of copper stocks and cash contracts in London Metal Exchange warehouses, appears to have raised the position to above 90 percent, latest data from the world's biggest metals market showed.

Industrial metals markets have since mid-November been watching the dominant position, the holder of which the LME has not identified, and which gives holders access to the metal used in power and construction.

Traders and analysts said the position was unlikely to be sustained and that it was probably a combination of many positions -- including client holdings and positions held by proprietary traders -- within a company.

Such positions that are built up often disappear just as quickly as they appear, they said. JPMorgan (JPM.N: Quote, Profile, Research, Stock Buzz) has been cited as the dominant holder of the copper warrants. JPMorgan declined to comment.

"JPMorgan is the name that's been bandied around, but there is nothing going on ... to show it's a problem," said one LME floor trader. "It's just a position -- there's nothing sinister about it."

However, some say it is one of the reasons why copper hit a record high of $9,267.50 a tone on Tuesday.

A spokesman for JPMorgan, asked by Reuters to comment on the market talk, said the company did not hold more than 90 percent but declined to comment further.

Also on Tuesday, the Financial Times reported that JPMorgan had reduced a large position in U.S. silver futures. The company's silver futures positions would be "materially smaller" in the future, the FT reported.

Large holdings of LME stocks can occur unintentionally and are not unusual for large companies with many divisions and clients that delve into metals markets.

At present one company holds dominant positions of between 50-80 percent in both nickel and zinc cash contracts and stock warrants.

The LME has the power to step in and force such long position holders or "longs" to make metal available to other market players by imposing its lending guidelines, which are aimed at ensuring orderly markets.

Under these guidelines, if an LME member or client holds 50 percent or more of the warrants or cash today/cash positions, it should be prepared to lend at a premium that is no more than half a percent of the cash price for a day.

A spokesman for the LME futures market, which is one of the few remaining open outcry exchanges, declined to comment on the copper position.

"I suspect it could all turn out to be a bit of a storm in a tea-cup," said Gayle Berry, analyst at Barclays Capital.

COPPER TIGHTNESS

Falling ore grades, disruptions and project delays also mean that copper supply will, possibly starting this year, fall short of demand estimated at about 19 million tones this year.

Highlighting such tightness, since February, LME copper stockpiles have dropped by more than one third to 350,900 tones, from six-and-a-half year highs of 555,075 tones in February.

"If you have inventories that continue to be drawn down, then you're going to have a concentration as a function of that," Berry at Barclays said of the copper dominant position.

"Then throw into the mix the potential for warrant buying for the exchange traded funds, that's what is all adding to this," she added.

Last week, ETF Securities' physically backed copper, tin and nickel exchange-traded products (ETPs) made a tentative debut in London, as investors sought to gauge sentiment ahead of potentially larger offerings.

Deutsche Bank said in October ETPs backed by copper could hold 300,000 to 400,000 tones of metal.

Concerns that ETPs will exacerbate tight supplies of copper helped propel prices higher.

Worries over copper supply tightness has also pushed the premium for cash copper over the three-month contract to about $70, the steepest since October 2008.

In August, a tight aluminum market caused the premium for cash material to rise, and the year before, the scale of large long positions in the LME tin market caused market concern. (Additional reporting by Pratima Desai, Melanie Burton)

(Reporting by Michael Taylor; editing by Anthony Barker)

Copyright 2010 Thomson Reuters. Click for Restrictions.

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