The Bronze King: An Empire Built on Manipulation

Since the 1990s, the commodity market has become more and more important. More and more investors, traders and merchants buy futures, hedge positions, speculate, and generally get the most out of the complex financial instruments that make up the commodity market. income. Through all these activities, people who rely on futures to eliminate risk have raised concerns about large speculators manipulating the market.

In this article, we will review one of the largest cases of commodity market manipulation in the past and what it means for the future of futures.

Key points

  • Market manipulation is the act of artificially raising or lowering the price of securities or otherwise influencing market behavior for personal gain.
  • In the 1990s, “Mr. Copper”, Yasuo Hamaka monopolized the copper market and manipulated its prices through short-term squeezing.
  • Although it was ultimately successful, market forces prevailed, and Hamanaka ultimately lost nearly $2 billion.

5%

There is still a sense of mystery surrounding Yasuo Hamanaka, also known as Mr. Copper, and the extent of his loss to the Japanese trading company Sumitomo. As the head of Sumitomo Metal’s trading department, Hamanaka controls 5% of the world’s copper supply.

This may sound small, because 95% is in the hands of other people. However, copper is a poorly liquid commodity and cannot be easily transferred around the world to cope with shortages. For example, the increase in copper prices due to shortages in the United States will not be immediately offset by shipments from countries with excess copper.

This is because it costs money to move copper from storage to delivery storage, and these costs can offset price differences. The challenge of shuffling on a global scale and the fact that even the largest players have only a small market share make Hamanaka’s 5% very important.

set up

Sumitomo owns a large amount of physical copper, copper in warehouses and factories, and holds a large number of futures contracts. Binzhong used Sumitomo’s scale and huge cash reserves to squeeze and squeeze the market through the London Metal Exchange (LME). As the world’s largest metal exchange, the LME copper price basically determines the world copper price. In the nearly ten years before 1995, Hamanaka artificially kept this price high, and thus obtained a premium profit by selling Sumitomo’s physical assets.

In addition to selling its copper, Sumitomo also benefits in the form of commissions on other copper transactions it handles, because commissions are calculated as a percentage of the value of goods sold and delivered. The artificially high price allows the company to obtain greater returns for all its copper trading commissions.

Squeeze shorts

Hamanaka’s manipulation is the common sense of many speculators and hedge funds, in addition to his long physical and futures copper. However, whenever someone tried to short Hamanaka, he would continue to inject cash into his position, and the time to go short was exceeded simply by having a deeper pocket. Hamanaka’s long cash position forced anyone shorting copper to deliver goods or liquidate their positions at a premium.

Unlike the United States, the LME does not have a mandatory position report, nor does it show statistics on open positions, which helped him a lot. Basically, traders know that the price is too high, but they don’t have exact figures on how much Binchu controls and how much reserves he has. In the end, most people reduced their losses and let Hamanaka do whatever they wanted.

Mr. Copper’s Fall

Nothing is eternal, and Binzhong’s corner of the copper market is no different. Market conditions changed in 1995, thanks in large part to the recovery of China’s mining industry. The price of copper has been significantly higher than it should be, but the increase in supply has brought greater pressure to the market. Sumitomo Corporation has made a lot of money in its manipulation, but the company is in trouble because it is still long copper when it heads down sharply.

To make matters worse, shortening its position—that is, hedging it with a short position—will only make a large number of long positions lose money faster, because it will go against itself. Although Hamamaka is struggling to get rid of most of the ill-gotten wealth, the LME and the Commodity Futures Trading Commission (CFTC) have begun to investigate the manipulation of the global copper market.

deny

Sumitomo responded to the investigation by “transferring” Hamanaka away from his trading position. The removal of Mr. Cooper was enough to get the shorts really started. Copper prices plummeted, and Sumitomo Corporation announced a loss of more than 1.8 billion U.S. dollars, and the loss may be as high as 5 billion U.S. dollars, because long positions are settled in a sluggish market. They also claimed that Hamanaka was a rogue trader and that the management had no knowledge of his behavior. Hamanaka was charged with forging the signature of his boss on the form and was convicted.

Sumitomo’s reputation has been tarnished because many people believe that the company cannot be unaware of Hamanaka’s control of the copper market, especially because it has profited from it over the years. The trader argued that Sumitomo must know it, because every time a speculator tries to shake his price, it injects more money into Binzhong.

fall out

Sumitomo responded to these allegations by implicating JPMorgan Chase and Merrill Lynch. Sumitomo provided loans to Hamamaka through structures such as futures derivatives and accused the two banks of maintaining the implementation of the plan. All companies filed lawsuits against each other and were convicted to some extent. This fact harmed Morgan’s case in similar charges related to the Enron scandal and energy trading business Mahonia Ltd., for his part, he served his sentence without comment.

Bottom line

Since the copper market manipulation, the LME has added new agreements to prevent similar twists and turns in the market. In today’s market, long-term manipulation like Hamanaka is almost impossible, because there are more participants and greater volatility, bulls and bears face off every day, and real-time quotes flicker on the battlefield. In fact, the commodity market faces the opposite problem-short-term price spikes brought about by well-funded speculators. The strange two-day spike in cotton prices in March 2008 is an example of this problem.

As the problems of the new electronic commodity exchange Intercontinental Exchange (ICE) are being resolved, many loopholes have been opened. The use of swaps and synthetic derivatives by hedge funds and institutional buyers who want to go beyond CFTC and exchange restrictions makes it more difficult to find commodity manipulation.

Unfortunately, this means that futures have lost some value as a hedging tool for merchants to hedge market risks and price fluctuations. Investors and businesses can only hope that ICE will continue to improve and make market manipulation of commodities a thing of the past.

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