1996: A LOOK BACK — 1996 a year metals traders would like to forget

Many a metal trader will have popped the cork on his New Year’s bubbly, confident that 1997 can hardly be worse than 1996. Precious metals nosedived, and the base metals went for a bumpy ride courtesy of a copper-trading scandal that threatens to cost Japanese conglomerate Sumitomo as much as US$4 billion.

The scandal at Sumitomo broke in June, when copper trader Yasuo Hamanaka, whose share of world copper trading earned him the nickname “Mr. Five Per Cent,” confessed to internal auditors that he had bought a heavy long position in the copper futures market and then, finding that the market had turned against him, attempted to prop up the copper price by buying physical metal.

It transpired that Hamanaka had been playing the copper market for years, apparently aided by metal-trading agencies of the Chinese government. When short sellers (led by commodity funds and Montreal-based scrap merchants American Iron & Metals) began to dominate the copper market in 1995, Hamanaka began buying physical metal to create an artificial shortage on the spot market. But ultimately the bears won out and copper headed on the downward spiral, taking the other base metals with it. By mid-June, the red metal, which had started the year above US$2,500 per tonne, was testing the US$1,800 level. It traded in the US$1,800-2,000 range for most of the rest of the year but has since recovered to around US$2,200 per tonne.

The affair dented the reputation of the London Metal Exchange, whose management spent much of June issuing damage-control statements that had an increasingly desperate ring to them. The New York Mercantile Exchange, which houses a copper futures market in its Commodity Exchange of New York (Comex) division, interpreted the trading scandal as a sign that the much larger LME was out of control, and took to issuing statements deploring the condition of the copper market, while noting, just in passing, that it hadn’t happened on their floor. (In fact, Hamanaka had traded on both exchanges, and through several metals brokers.)

British and U.S. commodities-trading regulators began an investigation, with some half-hearted help from the Japanese Ministry of International Trade and Industry, which seemed to hope the whole situation would go away. Criminal charges against Hamanaka — sworn out by his erstwhile employers — are now before the Japanese courts.

The LME, for its part, made an undertaking with the Securities and Investment Board (the main U.K. regulator) to strengthen its regulatory structure. The LME proposed to ensure that traders would have to report large futures positions more often, that the LME warehouse rules were tighter, and that it would share market-surveillance information with the U.K. securities enforcement agency and with regulators and exchanges overseas — notably Comex.

Meanwhile, copper mining companies took hits on the stock market, and several projects (for example, Gibraltar Mining’s planned Lomas Bayas mine in Chile) were placed on hold until the situation became stable.

All the other base metals were affected, to a greater or lesser degree, by copper’s troubles. Most went into a slump in June and July (only to recover somewhat in August and September) and have held to a steady downward trend since.

* Aluminum’s fortunes, predictably, were closely tied to copper. Trading in a US$1,550-to-1,700-per-tonne range for the first half of the year, it took two swan dives — one in June-July and the other in September-October — but still held above US$1,400 per tonne. And, like copper, it rebounded near the end of the year to close out just above US$1,500.

* Zinc passed a relatively quiet year, with a brief price spike in early March to top near US$1,120 a tonne. Like all the base metals, l’affaire Sumitomo hurt prices at mid-year, but, since November, zinc has been trading in a slightly higher range (US$1,050 to US$1,090 per tonne) than where it began the year.

* Lead, on the other hand, has seen a more-or-less steady decline since April, when, for a few sweet days, it held above US$850 a tonne.

* Nickel prices, also, headed down for much of the year. From a price of US$7,600 per tonne in January, it reached US$8,800 in some early February trading, then began a fairly consistent descent to test the US$6,700 level.

* Tin will end the year lower than it began, but not by much; the metal seems to be settling into a narrow price range after a decade of wild price swings following the collapse of the tin cartel.

The precious metals, meanwhile, are ending the year much lower than they began.

* Gold started the year looking good, breaking US$400 per oz. in February and topping at US$415. Driven by both physical demand and uncertainty in the currency markets, the yellow metal looked as if it was over the barrier for good. But the euphoria did not last, as the price slid back to the US$390 range by mid-March.

Since then, gold has been on a 1-way ride, breaking through US$370 per oz. in early December. The U.S. dollar is comparatively strong, putting a damper on the price, and there has been little or no talk of heavy physical buying.

* Silver, which started 1996 around US$5.70 per oz., spent most of the year mirroring gold’s downward trend.

* Platinum and palladium suffered as well, with palladium testing 3-year lows.