The dominant position that had been present in the copper market since November – and was owned by JPMorgan at least for a time – has been quietly closed.
How has the market reacted? Hardly at all.
The disappearance has attracted much less fanfare than its emergence, which was the focus of much breathless coverage in some media and the blogosphere.
Copper prices rallied to a record above $9,800 a tonne on Tuesday, higher than the prices seen when the dominant position was in play. The spread between copper for three-month delivery and metal for immediate delivery – an indication of the tightness of the market – has also stabilised at about $15 a tonne.
By January 19, according to daily positioning reports from the London Metal Exchange, the copper position – which at one point accounted for more than 80 per cent of available copper inventories at LME warehouses – had been sold into the market and no trader held more than 30 per cent of copper stocks.
LME traders agree that, while the knowledge that there is a dominant position in the market makes them a bit jittery, other factors such as a huge and long-anticipated supply shortfall, or the need for Chinese traders to buy LME contracts in order to roll their hedges, have a greater impact.
That the market has been able to digest the presence of a dominant position with relatively little disruption speaks for the LME’s idiosyncratic system of managing large positions. And this is not a one-off: there were 617 instances of dominant positions across the LME metals markets last year.
Policymakers attempting to curb speculation in commodity markets by imposing position limits should take note.
The LME may come under pressure from the drive led by Paris and Brussels to crack down on commodity market speculation in European markets, since it doesn’t place absolute limits on any trader’s position in its markets.
But in one sense, at least, the LME’s system is more stringent than anything proposed by US or European politicians: its focus is on control of inventories rather than futures.
Any party – bank, trader or hedge fund – that holds more than 50 per cent of available LME stocks of a particular metal is forced by LME rules to lend some of its position out to other traders at a set rate.
In this way the exchange attempts to ensure that no party can artificially inflate prices by hoarding a commodity. So far, it seems to be working about as well as anything else anyone has come up with (hard and fast position limits included). In their regulatory zeal, US and European politicians would do well to remember their end goals.
Copyright | The Financial Times Limited 2011.