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Mr. Copper - The W1nners' Club

‘Mr. Copper,’ as he came to be known, was Japanese commodity trader Yasuo Hamanaka. He worked for the Japanese trading company Sumitomo, and whilst at the helm of Sumitomo’s metal-trading division, Hamanaka was able to control 5% of the world’s copper supply.

5% may not seem a large amount, but copper is fairly unique in its illiquidity as it can’t be easily shipped around the world to meet changes in demand. An increase in the price of copper in the United States for example, wouldn’t automatically get cancelled out by a transfer of stock from another country that was holding a surplus because the challenges involved in moving copper between storage facilities costs a large amount of money – enough to cancel out any differentials in price. Add to this the fact that the remaining 95% of the world’s copper ownership was split amongst a long tail of players that themselves only owned small percentages each – all of a sudden Hamanaka’s 5% becomes more than significant.

Hamanaka had worked as a trader in Sumitomo’s non-ferrous metals department for the majority of his career and in 1986 he was tasked with the job of leading a team of copper futures traders.

Over the period between 1986 through to 1989, the Sumitomo copper team suffered huge losses that were largely a result of purchases and sales of physical copper alongside speculative futures dealing that Hamanaka had engaged in to offset them.

Hamanaka had apparently lied to superiors at the company, destroyed documents, falsified trading data and forged signatures to hide his losses which were kept in an unauthorised trading account. It was as a direct result of this unsuccessful attempt to recover the losses that Mr. Hamanaka began to devise an alternative long-term strategy that would seek to exert control of the market by putting Sumitomo, and by extension himself at the very heart of the worldwide supply of copper.

Hamanaka commenced with his elaborate plan in 1989 when he expressed his desire to squeeze the world copper market and thus drive up the price with the help of David Campbell who was president of metal trading firm RST Resources. The plan was for Hamanaka to utilise the full might of Sumitomo’s large copper supplies and the company’s capital.

When Campbell left RST and founded Global Minerals & Metals Corp just as Sumitomo became RST’s largest client – Hamanaka and Sumitomo followed him accordingly.

The next phase of the plan required the creation of an apparently legitimate commercial need to purchase large quantities of physical copper.

Working alongside Global therefore, Sumitomo entered into a number of contracts by which it would purchase copper on a monthly basis that all contained rather unusual clauses and price guarantees. One example is that Sumitomo would buy copper every month and the merchant would be required to pay 30% of the difference between the market price and the minimum price on futures contracts (an agreement to buy or sell something at a predetermined price at a specified time in the future) that had been purchased to hedge (offset) the supply contracts. Whenever the copper price rose above the pre-established minimum price, the merchant firm and Sumitomo would then share in the price increase. Global would also purchase copper from producers which would be sold to Sumitomo who would then sell it back to the producer at a profit whilst keeping the rest in stock.

This apparently legitimate maze of deals gave Hamanaka the ability to start hedging by purchasing as many futures contracts as possible via the London Metal Exchange (LME) which was so large that its trade volumes effectively decided the price of copper. Hamanaka then opened an unauthorised bank account with Merril Lynch which he allowed Global to use for the purpose of trading on behalf of Sumitomo.

By 1995, Sumitomo owned around 2 million tonnes of copper futures and Hamanaka was able to release the capital in these – in so doing he generated significant profits and controlled the copper cash supply so now had the ability to manipulate the market and drive up the price of copper to unprecedented heights.

As well as being able to directly profit from this eventuality, Sumitomo was now in a position to leverage its reputation as one of the world’s leading copper traders and handle large numbers of transactions on other people’s behalf – thus allowing Hamanaka to be seen as the saviour of the company as it earned commissions on the ever increasing copper prices.

Hamanaka’s meanderings were well known in the closed world of copper trading, but the regulatory failures of the LME meant that he was not obliged to disclose key trading information such as how much of the market he controlled and the levels of cash he held in reserve. Buccaneering traders would occasionally attempt to break his stranglehold on things by shorting their positions, but the amount of cash he had access to allowed him to ride the storm and buffer prices by injecting cash into the market. This caused the majority of his opponents to abandon their plans and let him do as he wanted.

Despite some people claiming to have evidence of wrongdoing as well as regulators and officials from the LME quizzing firms that traded on behalf of Hamanaka about his activities, the suspicions were not enough to bring him down.

The beginning of the end

 

As with most things in life however, the good times rarely last forever and Hamanaka’s activities began to get the better of him after the 1994 opening of an LME warehouse in California. Hamanaka was now exposed to the more rigorous compliancy regulations of the USA and by the end of 1995, copper prices had skyrocketed and cash flows had disintegrated as a result of copper entering the California warehouse and never actually leaving. The resultant ‘backwardation’ which means the cash price of a commodity is higher than its forward price, started to ring alarm bells as it is often an indicator that someone is trying to control the market.

The initial US Commodity Futures Trading Commission (CFTC) inquiry uncovered Hamanaka’s unauthorised Merryl Lynch bank accounts alongside other copper trading activities that could not be reconciled. Sumitomo’s senior management relieved Hamanaka of his duties as a result, citing a transfer away from trading to a more general role as the official reason for the move.

The market conditions changed dramatically in 1995 as a result of a resurgence of mining in China. Because the price of copper was already significantly higher than it should have been, Sumitomo had made large amounts of money on its price manipulation but was left exposed because the company was long on copper at a time when the marketplace was heading for a huge drop. To add to the situation, by shortening its position ie. hedging with shorts, Sumitomo’s long positions lost money much more quickly because the company had in reality been playing against itself.

Price Collapse

 

As the price of copper collapsed, Sumitomo dramatically announced that it had lost over $2.6 billion – 14 times the amount the company earned in 1996 and 40% of its net worth. Despite the catastrophic figure – an amount far higher than the losses incurred by Nick Leeson at Barings Bank – Sumitomo was still able to swallow the losses and continue trading.

Sumitomo’s reputation was now tarnished as many people believed the company could not have been unaware of Hamanaka’s tight grip on the copper market, particularly because it had profited from his actions for many years. The company also claimed that Hamanaka had been a rogue trader and that he had operated completely outside of the say-so of senior management.

Hamanaka was charged with forging one of his supervisor’s signatures on a form and was sentenced to eight years in jail, whilst Sumitomo suffered additional losses through fines totalling over $150m and the company’s former directors agreed to pay $3.55m – half of their retirement benefits, to settle the shareholder lawsuit that was filed against the company.

Other banks that had been involved in the scandal also felt the full force of the law as fines began to rain down on them for (in most cases unknowingly) assisting Hamanaka in his activities. Merrill Lynch was fined a total of $25m and Sumitomo themselves filed a suit against Chase Manhattan, UBS and Credit Lyonnais for their alleged roles in helping to fund Hamanaka.

In our opinion Sumitomo shouldn’t be too upset about losing more than $2 billion because of a dodgy employee. Here at The W1nners’ Club we did a criminal records check on several members of our sales team and whilst it was found that a couple of them are pretty much guaranteed to steal company equipment at some point going forward, not one of them has generated a single penny in revenue for the company yet – never mind lost any money!

 

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