China May Be Linked to Copper Scandal

The copper trading scandal widened Friday with reports that Chinese companies and trader Yasuo Hamanaka had sought to rig world copper prices and news that Japan will open its own criminal inquiry, following the lead of the United States and Britain.

That represents a reversal of Japan’s stance earlier, that none of its laws could have been broken because the unauthorized copper trades that produced $1.8 billion in losses for the Japanese company Sumitomo Corp. were conducted outside Japan.

As discredited copper mastermind Hamanaka remained in hiding, London’s Financial Times reported Friday that he had “worked in tandem” with Chinese state companies to control the price of copper.

Sumitomo vowed to investigate the cartel allegations and said those would be a key issue in meetings it is having with U.S., British and Japanese regulators.

“We think the copper cartel allegation will be one of the key points in our investigation with regulatory authorities,” a Sumitomo spokesman told Reuters.

Executives of China’s Non-Ferrous Metals Import & Export Corp. declined to comment.

Earlier this week, traders said that since 1988, Hamanaka used Sumitomo’s huge leverage as the biggest copper merchant to control big volumes of stocks in periodic bids to prop up prices at artificially high levels.

This year, powerful hedge funds decided that copper at $2,700 a metric ton was overpriced and started selling it on the London Metal Exchange as well as off the market, to try to force it down and break Hamanaka.

After an investigation of these developments, the Financial Times said Hamanaka’s power was such that George Soros, the U.S. hedge fund investor who placed winning bets against the British pound in 1992, gave up in March.

Sellers led by Herbie Black of Montreal-based American Iron & Metals sold more in May.

The Financial Times said Chinese companies with which Sumitomo had joint ventures played a key role in the trading. “Hamanaka used these contacts and the market’s knowledge of that relationship to influence prices, and both Sumitomo and Chinese companies profited from their shared knowledge of the other’s intentions,” it reported. “But once China sensed the tide had turned, it sold copper heavily, accelerating the collapse.”

According to one veteran metals trader, Hamanaka’s successful trading over almost a decade on the LME generated substantial profit for Sumitomo. Of course, the company later said that Hamanaka was merely a maverick who ran up $1.8 billion in losses.

A bid to rig the market, even in tandem with the Chinese, would not necessarily be illegal, top traders said, though such antics, they said, may vex market regulators such as the U.S. Commodity Futures Trading Commission and Britain’s Securities and Investment Board. Both agencies have investigators in Tokyo.

Also in Tokyo, however, are a lawyer and a detective from Britain’s Serious Fraud Office who are pursuing inquiries into whether laws might have been broken. A U.S. federal grand jury in New York has also begun a criminal investigation.

Japanese news services Jiji and Kyodo reported Friday that the Tokyo District Prosecutor’s Office would investigate whether there was a breach of trust by Hamanaka.