Wedge: Copper War

In mid-November 2005, an astonishing news was confirmed: Liu Qibing, deputy director of the National Material Reserve Adjustment Center (hereinafter referred to as the National Storage Center), the only trader of the National Storage Center on the London Financial Exchange, has been missing for a long time, but he left 8,000 lots (25 tons per lot) for the National Storage Center, a total of 200,000 tons of short contracts for March copper futures, with the expiration date of the contract on December 21, 2005.

Simply put, the so-called copper futures short contract means selling copper spot on the futures exchange at the agreed price when expiration date; the so-called copper futures long contract refers to buying copper spot on the futures exchange at the agreed price on the expiration date. During the futures investment process, if the investor expects the price to drop in the futures market, he will short the short contract in the futures market and sell the short contract. Assuming that the contract price at that time is 1,000 yuan per lot, if the price really drops to 800 yuan per lot when the contract expires, the investor can make a profit of 200 yuan per lot. By the same token, if the investor expects the price to rise in the future, he will go long in the futures market and buy long contracts.

The arrogant celebrity trader Liu Qibing is surrounded by international fund tycoons and is missing

In 1995, the Bank of Bahrain, a bank with a history of hundreds of years, was eventually acquired by Bank of the Netherlands for $1 because its Singapore trader, Leon, violated the regulations in derivatives trading. At the end of 2005, a similar figure appeared in the international copper market - the missing national reserve trader Liu Qibing.

Liu Qibing, who is Liu Qibing? Liu Qibing, a native of Hubei, graduated from the Department of International Finance of Wuhan University in 1990 and joined the National Material Reserve Bureau to work for the National Reserve Bureau in the past decade. Liu Qibing is the chief trader that the National Reserve Bureau has focused on training in the past decade. He was once known as "the world's best trader" because he discovered and eventually created a big bull market for copper varieties in 2003. For the market, Liu Qibing has always been a low-key and arrogant legend.

Liu Qibing received a half-year internship at the London Metal Exchange (LME) in 1995. After that, Liu Qibing returned to China to assist in establishing a computer network connecting the London Metal Exchange and the National Material Reserves Agency. Around 1998, Liu Qibing began to gradually become a trader in the futures market for copper in the National Reserve. He cleverly used the price difference between the Shanghai Futures Exchange and the London Financial Exchange for arbitrage. Until 2003, Liu Qibing's operations were profitable. These impressive trading records made Liu Qibing's trading reputation unmatched in the National Reserve system. No one would doubt his judgment of the market. No one believed that Liu Qibing would lose, and no one would have thought that Liu Qibing had actually been targeted by international fund tycoons, just because there was no suitable opportunity to start.

Although Liu Qibing has always been responsible for the copper futures operation of the National Reserve Center in the international market, his main time of the year is in Shanghai and Beijing. According to friends who are close to him, Liu Qibing prefers Chinese paintings, is taciturn and has a quiet place. In his office, there are no other decorations except for two conspicuous Chinese paintings of ink, flower and bird hanging on the wall. Liu Qibing likes market analysis, but he almost never expresses his opinions in public. Even those who have been in contact with him for a few years cannot remember what he said. Liu Qibing usually only talks about work and not about private matters, so he has always appeared as a mysterious figure in the entire Shanghai futures circle.

In September 2005, Liu Qibing judged that international copper prices would fall before the end of the year, so he gradually established 8,000 March copper short futures in LME, with the expiration date of December 21, 2005. The position building price was about US$3,500/ton. Although Liu Qibing's 8,000 short contract was established through 8 LME members' shares, even the total number of March short contracts that expired on December 21 of the entire LME in 2005 was only about 40,000. Excluding Liu Qibing

There are estimated that there are about 8,000 lots of 8,000 lots that Liu Qibing united. Judging from the average daily transaction volume of 50,000 lots of LME, if the on-site broker opens 1,000 lots of orders of 2,000 lots, someone will immediately stare at you. In the market, both parties with a large-scale transaction are well aware of each other. Brokers working here every day can make a news spread throughout the market within 5 minutes. Liu Qibing's huge transactions are also destined to be the target of international funds.

According to public information from the London Metal Exchange, within three days from September 19 to 23, the copper price fluctuated abnormally, from US$3,500 per ton to US$3,800. From then on, the copper price began to go on a road of no return and was in a unilateral surge. Faced with the rise in copper prices, Liu Qibing kept issuing sell orders, hoping that the copper price would fall, and always hoped that the last sell order would reverse the situation. As a result, the more you sold, the more you would lose. In mid-to-late September, Liu Qibing issued a total of 8,000 short positions, which made his opponents extremely excited. A group of hedge funds placed bets on these 200,000-ton short orders, and the continuous price of the price was pushed up. This was the result of the fund's encirclement.

After National Day, the price of copper has risen to around 4,000 US dollars, and Liu Qibing is powerless to make the situation come true. He was completely trapped under the international speculative fund, and he chose to disappear because of this. Until now, the world has disappeared.

The battle between the National Reserve and the International Fund: lasts for one month, and the National Reserve Center is defeated again

Liu Qibing only started the story of the national copper reserves that we want to tell. What the National Reserve Center did next pushed the story to a climax. We also saw a copper-out war between the National Reserve Center and the International Futures Hedge Fund that lasted for more than a month. The former was the main shorter player for LME March copper, and the latter was the main force of longs. December 21 is the delivery date of the LME March copper contract between the two sides.

In early November, news of Liu Qibing's disappearance had been circulating in the domestic futures industry, while the LME copper price had risen to around US$4,100. The possible losses faced by the 8,000 short contract established by Liu Qibing had reached US$120 million. The National Reserve Center had three options at that time: one was physical delivery; the second was forcibly closed the position and accepted the loss and came out; the third was to extend the period, that is, to continue to short, adjust the contract to a future expiration forward contract, and exchange time for space.

The first option is to transport 200,000 tons of copper (1/3 of the national output) to the designated warehouse of LME. In 2004, my country's copper demand reached 2.5 million tons, of which 80% needed to be imported, and my country's existing copper inventory was not much. Not to mention the physical difficulty of transporting 200,000 tons out of China, even if it is physically feasible, my country will never be able to send precious copper for delivery, because this will directly affect the safety of our country's materials.

The second option is to accept the loss and close the position and exit, which means that the National Reserve will bear a loss of US$120 million, which will be seized by futures hedge funds. This method is also unacceptable to the National Reserve.

Therefore, the National Reserve could only choose the third path to extend the contract expired on December 21, 2005 to February 21, 2006. According to the information obtained, the National Reserve had delivered 50,000 tons of copper and short-termed 150,000 tons of copper.

Faced with the continuous rise in copper prices, the National Reserve organized four copper auctions starting from November 16, 2005, selling 80,000 tons of copper to the market. On the one hand, the National Reserve hopes to show the market its determination to calm the copper price in this way; on the other hand, the National Reserve hopes to indeed lower the copper price by throwing copper to the market to reduce the losses of its LME short contract. However, unfortunately, in this confrontation between the National Reserve and international funds, the National Reserve lost again: Although China is constantly selling copper, the international copper price is still rising, the LME March copper price hit a record high of US$4,270, and the main contract of the Shanghai Futures Exchange 601 also rose sharply to RMB 37,410. The National Reserve sold copper four times, except for the first time the international copper price fell slightly, the other three copper prices did not suppress and rebound.

This information clearly shows the beginning of a cruel showdown in the futures market. Some people believe that this incident only reflects the opaque operation of the National Reserve Bureau or the lax internal control mechanism, which really underestimates the perseverance and determination of government departments to compete for the world capital market. In the long run, the war in the futures market is a necessary battle, which can prevent foreign investment funds from exploding the premium of China in the raw material market.

As one of the top big buyers, China has actually been trading low-key in the commodity, fuel, basic metals and raw materials markets, but has not gotten rid of the passive situation of being "encircled and suppressed" by bettors in the futures market and selling high and buying low in the spot market. Judging from the background of the National Reserve Bureau and the industry adjustment steps that the National Development and Reform Commission has matched, testing futures should be said to be a strategic decision to compete for the pricing power of the international raw material market.

International Commodity Fund is in a copper-out period war with the Chinese government, with the former long and the latter short. The March copper-out period is in sight, and the battle is in full swing.

Let’s first look at the bargaining chips of both sides. The biggest advantage of the National Reserve Bureau is the government’s credit and national economic strength, and it can seek policy support from relevant government departments. First, relevant officials of the National Reserve Bureau revealed that copper inventory reached 1.3 million tons, and the amount that can be sold is much higher than market expectations to suppress long forces; second, selling copper inventories suppress Shanghai copper futures prices in order to affect the world copper futures prices; third, relevant government departments conduct industry regulation to curb domestic demand for high copper. Recently, Jia Yinsong, deputy director of the Economic Operation Bureau of the National Development and Reform Commission, clearly stated that the copper industry, especially the copper smelting industry, has overheated investment, and special development policies related to the copper industry are currently being formulated. This is a way to cut off the source of the firewood to reduce copper demand.

International commodity funds have much more chips. The most important thing is that they have a lot of money in their hands and have a certain ability to withstand pressure. Therefore, they can refuse to believe the copper inventory disclosed by relevant officials of the China National Reserve Bureau, ignore the report that the World Copper Organization, HSBC and Standard Bank will become saturated, and continue to raise prices. So far, the copper prices in the LME market have hit new highs in a row and the holding level is stable. These funds will never stop until the delivery date.

Not only that, these funds are mostly old players in the international futures market, with heavy money set prices and rules taking advantage of themselves. If the rumors of the national reserve selling short in London are true and cannot be delivered at that time, speculative funds can make direct profits; if the national reserves can be delivered and the funds hold copper, they can wait for the national reserves to be sold at a higher price when replenishing the warehouse. These funds also have much greater room for maneuver in the world market, such as the adjustment of the strike time limit for copper production areas, the use of financial media with world influence, etc.

The economic field is a war without gunpowder, fighting for financial resources, intelligence and flexible systems. In this copper war, regardless of the winner or loss, there are also questions about the specific operation methods of the National Reserve Bureau. However, if China denies the negligence of competing for the pricing power of the world raw materials market, or uses criticism of the internal system to replace the pricing war in the international market, it is either too naive or lacks a basic understanding of the fundamentals of the world market.

Behind the resurgence of LME copper prices is the continued establishment of long positions for foreign hedge funds. According to the Associated Press, the US Moore Capital, Vega Asset Management, Touradji Capital hedge funds and the UK's hedge fund mainly engaged in commodity futures, Armajaro, have all established a large number of long positions after November 16. The London hedge fund Winton Capital, which originally had long positions.

Founder David Harding publicly stated: "We have been long for a long time and are still bullish." The reason why international funds continue to be bullish is because they expect China to hold huge short positions but do not have enough supply. In fact, Chinese officials have admitted the losses of national copper reserves. On December 12, Liu Mingkang, chairman of the China Banking Regulatory Commission, said that due to the lack of effective control of market risks, the "national copper reserves" incident is costly. This is the first and only time that domestic government officials have expressed their views on the "national copper reserves" incident.

Chinese companies: Why are I always injured?

In recent years, with the continuous and rapid growth of China's economy, China's demand for basic strategic materials such as energy, steel, ore, and agricultural products has become increasingly large. Domestic resources alone are far from meeting the demand, and it is necessary to import a large number of strategic materials from the international market. Due to the extremely large purchase volume of Chinese market, a unique Chinese phenomenon has been formed in practice: the prices of all materials needed by the Chinese market will inevitably double year by year, and China suffers a silence. In the futures market, China and Chinese companies have learned more painful lessons. Chinese institutions have been repeatedly seen through their trump cards by their opponents in the overseas derivatives market and let their fish be meat be worth reflecting.

Zhuzhou smelter is one of the largest lead-zinc production and export bases in my country. In 1997, Zhuye, an operator engaged in zinc hedging, overdrafted the transaction and did not report it in time after the loss occurred. As a result, it continued to sell zinc contracts in the London market, and was stared by foreign financial institutions and forced into positions, resulting in increasing losses. Zhuye finally chose to close the position and exit, with a loss of up to US$150 million.

China Cotton Reserve Center is a central enterprise established in March 2003. It shoulders the function of adjusting cotton surplus and shortage and balancing market supply and demand. Since October of that year, China Cotton Cotton imported more than 200,000 tons, betting that the domestic cotton price has risen. As a result, domestic cotton prices fell instead of rising, resulting in its speculation failure. It is conservatively estimated that its loss is around 600,000 yuan.

After 2003, China Aviation Oil (Singapore) Co., Ltd., which was listed in Singapore, sold a large number of call options on the market incorrectly judged the trend of oil prices, with a cumulative number reaching 52 million barrels. In October 2004, international oil prices soared sharply, but China Aviation Oil did not take measures to cut off the arm to avoid greater losses, but continued to expand, resulting in a sharp expansion of losses. Due to the inability to replenish positions for some speculative transactions, the company was forced to end some positions in the event of losses, and eventually lost US$550 million.

Whether it is the "National Copper Reserve Futures Incident" or the "China AVIC Oil Incident" or the "Zhuye Incident", the common feature is that Chinese companies lack the ability to control futures trading perfectly. In the absence of constraints and front-end monitoring, a trader can freely buy and sell futures contracts, and its headquarters cannot evaluate the potential risks of these positions in a timely and accurate manner, let alone resolve risks in a timely manner. Under globalization, Chinese companies must allocate various resources globally, and correspondingly need to use various derivatives and varieties to manage risks globally. However, Chinese companies often "focus on cost control and light on risk control" in this process, and will inevitably suffer a great loss. In the future, Chinese companies that use derivatives to manage risk across the world need to change their concepts.

After the incident of 200,000 tons of short positions in the State Copper Reserve, the relevant parties need to make a reasonable explanation and explanation on the causes and consequences of the entire incident. The State Reserve Bureau and the National Reserve Center to which Liu Qibing belongs are not qualified to engage in overseas futures trading. How did Liu Qibing enter LME trading? In addition, as international funds continue to raise copper futures prices, a large number of short positions under Liu Qibing's name need to be continuously added to margin, and the amount should be above tens of millions of dollars. After Liu Qibing's disappearance, his position has not yet been liquidated. So, where did these subsequent funds come from? Of course, the eight brokers of LME will not blindly continue to provide financing and credit support for these positions, unless they have received some hints or confirmations from China. In any case, the State Copper Reserve should choose the right time to disclose relevant information to the market, creating conditions for truly solving the incident in a market-oriented manner.

The "National Copper Reserve Futures Incident" is far from finally being resolved. There are many variables in it, but the core point is that only the market-oriented method is the fundamental solution. Although the "futures incident" of China AVIC Singapore Company is not the same as this "National Copper Reserve Event", its idea of ​​solving it in a market-oriented manner is worth learning from by the National Reserve. In addition to the National Reserve, LME's futures brokers, financing parties, etc. should pay the price for this.

Recently, the National Development and Reform Commission announced the investigation and policy of blind investment in the copper smelting industry. The investigation pointed out that in recent years, with the rapid growth of phased demand in the domestic market, my country's copper smelting industry has developed rapidly and its production capacity has continued to expand. At the same time, illegal construction has also occurred, and blind development momentum has caused the supply of copper concentrate to become increasingly tight and the prices continue to rise, which needs to attract attention.

In order to correctly guide the development of the copper smelting industry, relevant state departments will consider the environment, resources and energy affordability in accordance with national industrial policies, and study and formulate corresponding policies and measures from the perspective of comprehensive, coordinated and sustainable development. Suppress blind investment in the copper smelting industry to promote the healthy development of the copper industry. Industry insiders believe that this measure will help curb blind investment in the copper smelting industry, promote the healthy development of the copper industry, and will also have an impact on future copper prices.

The system of investigation after the incident is far from preventing problems. Although the corporate governance structure is already a matter that makes our ears sound cocooned. However, the common problems of incidents such as National Copper Reserve, AVIC Oil, and China Cotton Reserve are all lies in the lack of restrictions on traders and the contempt of risk control mechanisms.

"Its rise is booming, and its demise is suddenly sudden." There is nothing wrong with domestic companies using overseas derivative financial products to manage risks. The problem is that risk control must be done when conducting overseas derivative product transactions.

Who is next we care about?
Chapter completed!