Saturday, May 25, 2019

"Perhaps the most striking manifestation of the 2000s copper boom was the sight of charred human remains dangling from power cables"

In 2010 - 2012 Red Kite were the best copper traders in the world and took so much money off their counterparties they  pretty much destroyed Barclays metals trading division.

Alexander the coppersmith did me much evil: 
the Lord reward him according to his works
-either 2Timothy4:14 or the Barclays guys

More on Red Kite after the jump and as a special gift, one of the best Federal Reserve Bank monographs ever.

From Winton's Longer View:
Copper-Bottomed Booms and Busts
Across the world, desperadoes were shinnying up pylons, breaking into substations and using quad bikes to rip up hundreds of metres of live copper cables from train tracks, seeking to make a killing down at the scrap yard but often killing themselves in the process. Their knavery led to delayed and cancelled train services and power outages affecting entire cities. What would possess a putatively sane person to cut through a 100,000V powerline? And to what extent was the 2000s boom unique?
During the 2000s, the price of copper quadrupled, reflecting the extraordinary swell in demand by China. Urbanisation, rural electrification and growing car and appliance ownership resulted in burgeoning consumption. The typical eight-storey building uses around 20 tons of copper wire and pipes and China built thousands of such blocks during the 2000s. 1500 new cars, each containing 50lbs of copper, were hitting China’s roads each day. Millions of cell phones and PCs were sold in China, each containing ½oz and 1.5lbs of copper, respectively. Production struggled to keep up and inventories fell precipitously, triggering heavy speculative purchases. After touching 400c/lb in 2006, prices gyrated wildly before plummeting during the global slowdown in 2008. The market recovered within two years and when JP Morgan purchased over half of the LME’s warehoused copper in early 2011, spot prices hit a record 458c/lb.

Whilst unprecedented in terms of its sheer scale, the 2000s copper boom was certainly not a one-off event. As Fig. 1 illustrates, there have been many such booms and busts throughout history. The rest of this feature sketches out the most salient price movements in the past two centuries and discusses possible future trends.

Real Copper Prices (1850-2016)
Chart Real Prices
Figure 1. Annual average real (2016) prices; Source: USGS
Copper-Sheathing Boom (1780s-1830s)
Chart Annual London
Figure 2. Source: Babylon to Birmingham, pp.462-64
In the late 18th and early 19th centuries, the primary demand for copper was for sheathing the bottoms of boats, to protect against shipworm and seaweed. Copper-bottomed vessels were both faster and required less docking time than their untreated counterparts. The Royal Navy’s decision to re-hull their entire fleet in the 1780s gave Britain a strategic advantage during the Napoleonic Wars but also propelled copper prices from £78/ton in 1785 to £200/ton in 1807, since demand far outstripped the output of the mines in Cornwall and South Wales. This is the highest real price on record, equivalent to £20,470/ton in today’s money. However, the reign of high prices encouraged the development of overseas mining operations, notably in Chile, pushing prices back down to £85/ton by 1830. Pure copper sheathing was also being increasingly replaced with Muntz metal – an alloy containing 50% zinc and 50% copper.
Cornish Mine
Figure 3. Muntz metal sheathing on the Cutty Sark's hull. Prior to sheathing, the Royal Navy relied on organic 
anti-fouling agents such as the unpromisingly named “Black Stuff”, “Brown Stuff” and “White Stuff”
Breaking Swansea’s Stranglehold (1840s-1860s) The explosive growth of the railways in Britain during the 1840s created a need for new source of copper for boiler plates, etc. Serendipitously, 400-ton boulders of native copper were discovered in upstate Michigan, heralding a vast increase in the world’s supply of copper ore. In view of the magnitude of the discovery, prices might have remained muted were it not for the actions of the Associated Smelters of Swansea – the world’s first copper producer cartel. During this period, Swansea’s smelters processed virtually all of the world’s ore, for they alone knew the secrets of the much-vaunted ‘Welsh Process’. This allowed them to dictate the prices at which they bought ore and to restrict their production to boost the prices of their finished products.
Cornish Copper Mine
Figure 4. A Cornish copper mine, 1830s
Prices began rising again in the 1850s, peaking at £135/ton in London at the height of the Crimean War. After a post-war slump, demand surged again with the outbreak of the US Civil War; the Union’s need for brass buttons, copper canteens and bronze cannons pushed Lake Superior Ingot from 17c/lb up to a whopping 55c/lb (see Fig. 5). High prices typically pave the way for lower prices by stimulating production, but on this occasion they often had the opposite effect by encouraging Michigan’s obstreperous miners to demand higher pay, get drunk and sit on their hands all day. One superintendent was forced to instil discipline by pelting his miners with rocks and scalding them with steam from the mill’s boilers! However, many mine owners sidestepped the problem by replacing their local workforces with foreign labour, notably from Cornwall, Wales and Scandinavia. Not only did they prove more sedulous, they also brought with them the secrets of Welsh process and established local smelting plants that broke Swansea’s stranglehold. Perhaps more significantly, the newly developed Bessemer process began to make a mark, vastly increasing the productive efficiency of the furnaces.

Lake Superior Ingot Prices (1860-1867)
Chart Lake Superior 1860
Figure 5. Monthly high-low prices for Lake Superior Ingot; Source: The Copper Handbook (1911)
Secretan Corners the LME (1887-89)
There have been numerous attempts to corner copper, pushing its market price far above the level dictated by its fundamentals. The first and largest such attempt (by the standards of its time) was carried out by a Pierre Secretan, France’s largest brass manufacturer, between 1887 and 1889. By way of comparison, Secretan controlled over 80% of the world copper supply and singlehandedly pushed up prices by 150% whereas Yasuo Hamanaka (a.k.a. “Mr Copper”) who famously cornered copper in 1995, only ever controlled 5%.

A sustained fall in copper prices from 1882 encouraged consumers to run down their inventories, assuming they’d be able to purchase additional stocks even more cheaply in future. Meanwhile, despite the general surplus in copper production, the LME’s standard Chile bar contract had become under-supplied. Observing these two trends and anticipating that recent innovations such as the light bulb, trolley car and telegraph would create an insatiable demand for copper, Secretan sought to corner the metal....

We looked at Red Kite in a series of posts in late 2011 regarding Barclays' mega losses in copper trading:

UPDATED--Barclays Hit With "Immense" Copper Trading Loss; 50 Sigma Move In Cancelled Aluminum Warrants (50-Sigma events don't happen)
Barclays Capital to Wall Street Journal on Copper Losses: "Nonsense"
Barclays, No Sumitomo here, Copper Traders Whupped by Red Kite (BARC.L)
Red Kite: The Folks Who Bested Barclays' Copper Traders

Red Kite also shows up in a series of posts in 2012:
"SEC OKs Plan To Devastate Copper Market, Economy" (JPM)
The World Cries Out for Industrial Metals ETF's, JPMorgan et al Hears Those Cries
Red Kite Wins Time In Fight Against JP Morgan Copper ETF

And as promised:

Boston Fed: In Which A Copper Speculator's Attempted Corner Causes A Stock Market Crash

From the Federal Reserve Bank of Boston:

Panic of 1907
Federal Reserve Bank of Boston
"Crash Crash Crash"
Boston Post-October 18, 1907

Although the headline referred to events in New York, Boston Post readers knew exactly what it meant.
Effects of the financial crisis were certain to reach beyond Wall Street.

¶ Financial.panics and bank runs were all too common during the 19th and early 20th centuries. Some were more severe than others, but most followed the same general pattern. The misfortunes of a pronminent speculator would undermine public confidence in the financial system. Panic-stricken investors would then scramble to cut their losses.
 And because it wasn't uncommon for speculators to double as bank officials, worried depositors would rush to withdraw their money from any bank associated with a troubled speculator. If a beleaguered bank couldn’t meet its depositors’ demands for cash, panic would quickly spread to other banks. Remember! There was no federal deposit insurance until 1933. If a bank failed, depositors had little hope of ever seeing their money again.

 ¶ With far less government regulation of the financial system than there is today and with no government welfare "safety net," many Americans suffered sudden and dramatic reversals of fortune when a panic struck. Even in a relatively mild panic, fortunes evaporated and lives ended in ruin.

¶ The following pamphlet" recaps the chain of events that came to be known as The Bank Panic of 1907. By most measures, it was not- the worst panic in U.S. history. But in retrospedt, it was a watershed event that had a lasting impact on the financial system.


"In Which the Downfall of a Prominent Speculator Rocks the Financial System, and a Prominent Millionaire Saves the Day"

Headline, Boston Post - October 17, 1907
On October 14, 1907, the stock of United Copper Company soared past $62 a share. Two days later it closed at $15, and one ~ F. Augustus Heinze was well on his way to financial ruin. 
The rise and fall of F.A. Heinze had been nothing less than spectacular. Only 18 months earlier, the.onetime owner of a Montana copper mine had ridden into New York with $25 million in cash and stocks garnered in an out-of-court legal settlement with a rival mining company. He soon attracted notice by aggressively purchasing interests iu several New York banks and engaging in speculative activities.  
As is so often the case when things are going well, Heinze seemed incapable of making a bad business deal. His downfall took everyone by surprise.  
The financial empire of. Augustus Heinze began to unravel ill October 1907 when he overreached himself in an effort to corner the stock of United Copper Company. (An investor who tries to "corner the market" on a commodity or a stock is attempting to gain control in order to fix the price.) In less than 24 hours, he dropped $50 million, and the financial markets went haywire. According to an article in the October 18, 1907 edition of the Boston Post:  
Sensations followed other in rapid succession in the financial district today, as the result of the collapse of the projected corner in United Copper and the suspension of a prominent brokerage firm yesterday. As a result of these sensations the stock market was halting and irregular, but there was an apparent feeling that the break of the attempted corner in United Copper had cleared the atmosphere somewhat and the market rallied before the close. 
(The "prominent brokerage firm" mentioned in the article was Otto Heinze & Co., which was run by the brother of F. Augustus Heinze and was heavily involved in the disastrous attempt to corner United Copper. In addition, F.A. Heinze’s Butte (Montana) Savings Bank failed on October 17, 1907.)  
Predictions that the atmosphere had cleared proved for too optimistic. The worst was yet to come.  
Had F. Augustus Heinze been a mere copper speculator, the financial markets might have been able to shake off the news of his collapse....MUCH MORE