Special Feature
“Unlike many other commodities, copper is a heavy-weight and difficult to transfer commodity - a highly illiquid one.” A Decade For Mr. Copper Mr. Copper or Mr. Five Percent, as Yasuo Hamanaka is also known, certainly won’t be forgotten by copper market participants as he was able to dominate the market for a whole decade running until 1995. As head of metals trading at Japanese Sumitomo Corp, he was in the enviable position of having access to the type of money he needed in order to control 5% of the copper market. Unlike many other commodities, copper is a heavyweight and difficult to transfer commodity — a highly illiquid one. A trader buying and warehousing it in the right place could in fact corner the market with just small percentages of the whole deliverable copper, as was the case with Hamanaka. By holding physical copper and trading futures, he kept prices artificially high and so enjoyed premium profits from the sale of physical assets to traders desperately seeking copper to honor their expired short futures contracts. A classic maneuver. Most of the trading occurred at the London Metal Exchange (LME), an exchange renowned for having pretty loose trading restrictions and reporting rules. This was a key ingredient for Hamanaka’s success during the decade because even though many traders knew about Hamanaka’s intentions, they had no idea exactly how much he controlled.
With a deep pocket in Sumitomo and some mysticism attached (which always helps in the rumour driven markets), Hamanaka was able to frustrate any attempt from traders to short copper and attack his supremacy. Each attempt at that goal by his fellow traders failed and Mr. Copper continued to steadily accumulate profits for him and his company. Unfortunately for Mr. Copper it seems that 1995 would herald a new era for copper. Mining productivity became resurgent in China, pressuring prices down. With the new increase in supply, it became very difficult for Hamanaka to control prices and so he was forced to start closing some contracts and hedge some positions — an action that also further pressured prices down. Adding to this negative picture, the LME and the CFTC (Commodity Futures Trading Commission) decided to open up a case to investigate market manipulation in copper. Sumitomo decided to sack Hamanaka from his trading post, probably fearing the probe. This decision was catastrophic. With Mr. Copper out, traders were more than happy to short copper. They were able to drive down copper prices to such an extent that Sumitomo began to lose large amounts of money. Sumitomo went further and labeled Hamanaka as a rogue trader and denied they were aware of his trading behavior. Hamanaka’s manipulation proved lucrative for almost ten years but a deadly combination of greed and negative fundamental developments reversed his gains and led him being sentenced to eight years in prison for hiding $2.6 billion in copper trading losses. He was released from jail in 2004. Hamanaka accepted his sentence but Sumitomo never accepted any guilt — a stance many find incredulous. FINAL VERDICT: This was one of the most successful and long-lasting corners but profits very quickly dissipated and turned into near catastrophic losses.
12 | www.financial-spread-betting.com | February 2013