Copper prices on Friday plunged 10% to their lowest level in two years after the shocking announcement that the world’s premier copper trader allegedly lost $1.8 billion for Japan’s giant Sumitomo Corp. in a decade of unauthorized dealings.
Meanwhile, regulators and analysts began asking how one trader could dominate one market, and the chief regulator of U.S. futures markets criticized Sumitomo’s lack of oversight. Authorities here and in Britain put the matter under further review.
Sumitomo announced the loss Thursday, saying it had fired trader Yasuo Hamanaka, but adding that the debacle would not jeopardize its overall financial health. Because Sumitomo is the world’s largest player in the copper market, dealers fear the company will sell a big chunk of its copper holdings to offset the trading losses, thus depressing the overall market.
Not taking chances, many other copper traders went ahead Friday and sold the metal, along with copper futures and futures options they held. The sellers included so-called hedge funds that specialize in making aggressive bets on both the buy and sell sides of securities, currencies and commodities.
The price of copper futures for July delivery plummeted 10.30 cents, to 93.85 cents a pound, on the Comex division of the New York Mercantile Exchange. That’s a 25% plunge from only a month ago, when copper for near-term delivery stood at $1.25 a pound.
On the London Metal Exchange earlier Friday, the current, or “cash,” bid price for copper dropped to 97 cents a pound from $1.05 on Thursday.
As for consumers, the copper market is still too volatile to judge whether the Sumitomo scandal might eventually affect retail prices, “but I’m inclined to say that they won’t,” said John Gross, publisher of the Copper Journal newsletter in Huntington, N.Y.
Copper is predominantly used in telecommunications and electrical wiring, tubing, electrical motors and heating and other ventilation equipment. In consumer goods such as telephones and computers, however, copper is but one small component.
Nonetheless, the drop in copper prices quickly reverberated through U.S. industry and the stock market. Major U.S. producers such as Phelps Dodge Corp., whose copper prices are determined daily by the commodities markets, face an immediate drop in sales. That in turn prompted investors to push those companies’ stock prices lower.
The scandal comes at a time when the copper market is already under pressure. Forecasts are that production is outpacing the world’s demand, essentially creating a copper glut, despite economic growth in the United States and elsewhere.
And while the markets were in turmoil Friday, government regulators and commodities analysts were asking how one trader could have such a huge impact worldwide.
Earlier this week, for instance, prices plunged merely on rumors that Hamanaka had quit his post. The rumors were partly true--Sumitomo had moved him off the trading desk in May as its inquiry was gaining momentum.
“It’s always dangerous if one individual or one entity has too much control in any one area,” said William O’Neill, director of futures research at Merrill Lynch & Co., noting that Hamanaka was “a legendary trader” who could single-handedly move the market.
John E. Tull Jr., acting chairman of the Commodity Futures Trading Commission, chief regulator of U.S. futures markets, on Friday criticized Sumitomo’s lack of oversight.
“This episode tells us, just as Barings’ did, that there’s a lack of internal controls at some of these large international corporations,” Tull told Bloomberg Business News.
He was referring to the now-defunct British bank that was sunk by $1.3 billion in losses in early 1995 because of wayward trading by one of its Singapore dealers.
The CFTC had been investigating Sumitomo’s trading for several months, and that is what led to Sumitomo’s discovery of the unauthorized deals. On Friday, the London Metal Exchange and Britain’s fraud office said they too will investigate the episode.
Despite the sharp drop in prices Friday, some dealers said the copper market was not in a panic. “We’ve had many more volatile days than today,” said Cindy Ginsburg, a vice president at the metals trading firm ED&F; Man in New York. “We didn’t see a lot of disorderly trading.”
There were plenty of rumors, however. One had it that Sumitomo controls as much as 70% of the copper supplies in a London Metal Exchange-owned warehouse in Long Beach that it uses to facilitate shipments of the metal throughout the Pacific Rim.
Others speculated that Sumitomo has nearly 1 million tons of copper in its possession. But Thomas Foster, a spokesman for Phoenix-based Phelps Dodge, said: “We really don’t know what their position is.”
* ‘THE HAMMER’: Sumitomo trader wielded great power in the copper market. D2
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Copper prices plummeted Friday in the wake of the Sumitomo Corp. trading scandal. But prices already had fallen steadily since early May because of concerns about excess copper production. Weekly closing prices (except latest) for copper, in dollars per pound:
Friday: $0.9385, -$0.103
How Copper Stocks Fared:
Phelps Dodge: $65, -$0.50
Inco: $31.625, -$0.25
Asarco: $28.375, -$0.75
Freeport McMoran: $30.125, +$0.125
Cyprus Amax: $23.875, -$0.625
Hall of Blame
Sumitomo’s Yasuo Hamanaka is just one of several investors in recent years whose allegedly unauthorized trading is deemed responsible for costing their organizations millions of dollars.
Yasuo Hamanaka: This former head of copper trading for Sumitomo, the world’s biggest copper merchant, allegedly made unauthorized trades for more than 10 years, causing huge losses that may total $1.8 billion.
Toshihide Iguchi: This former Daiwa Bank executive vice president, who worked in the bank’s New York branch, allegedly made 30,000 unauthorized trades in U.S. Treasury securities over 11 years. The loss, announced in September 1995, amounted to about $1.1 billion--one-seventh of the Osaka, Japan-based bank’s capital. U.S. authorities ordered Daiwa to close down its U.S. operations.
Nick Leeson: This 28-year-old former trader for Barings bank placed huge sums on Asian financial futures and options and lost about $1 billion when these securities failed to move in the direction he bet they would. The fraud, uncovered in February 1995, forced the venerable British investment bank into receivership.
Robert Citron: This former Orange County treasurer lost $1.7 billion in public funds after making a wrong-way bet on interest rates. The debacle, which unfolded in December 1994, forced the county to declare bankruptcy.
Joseph Jett: This former trader allegedly falsified $350 million in trading results to earn himself a higher bonus at Kidder Peabody & Co., which was subsequently sold and broken up in October 1994.
Sources: Times and wire reports.
Researched by JENNIFER OLDHAM / Los Angeles Times