China's secretive State Reserves Bureau sold copper through its first public auction today and announced a second sale, in a bid to convince the market it had the clout to deflate rocketing world prices.
The bureau said it would sell 20,000 tonnes of copper next week after it sold the same amount today. The unusual auctions came as prices stayed high, supported by the possibility the bureau would have to cover a bet worth hundreds of millions of dollars that prices would fall.
The sale pressured local spot market prices, but has so far failed to dent benchmark copper futures on the London Metal Exchange, which hit a new record overnight of $4,174 a tonne.
Many traders have interpreted the unusual openness as a desperate effort to unwind a dangerously large short position. Liu Qibing, who handled LME trading for the bureau, has been uncontactable for a few weeks.
Traders say he had a short position of 150,000 tonnes to 200,000 tonnes on the LME. That compares with world exchange stocks of 140,000 tonnes, of which the LME holds 65,000 tonnes, Barclays Capital analyst Ingrid Sternby said in a research report on Tuesday.
Bureau statements that the trader acted on his own raised questions of whether the bureau would honour the obligations or leave its brokers exposed.
If exercised this spring, when the market believed copper futures had peaked at $3,000 a tonne, the position would have represented a loss of more than $200 million.
China's reserves of copper, like those of grains and gold, are a state secret. The bureau normally buys and sells without fanfare, and some traders believe it has recently purchased copper from large domestic producers.
Auction prices were below spot prices in eastern China, which dropped 330 yuan to 38,900 yuan to 39,000 yuan a tonne on Wednesday. The bureau's auction included older lots of copper that might therefore fetch a discount to current spot prices.
By selling in China, the bureau has widened the price gap between Chinese and global markets. That may discourage Chinese importers from buying copper, increasing global supply but causing the domestic market to tighten again.
The auction's first sale, at 38,650 yuan a tonne for 100 tonnes of copper produced in the United States in 2004, set a positive tone and subsequent lots went briskly, traders said.