Copper mcx From the Sumitomo Scandal to Contract Specifications Mastering the Art of Trading

Marketopedia / Trading in Currency, Commodities and Government securities / Copper mcx From the Sumitomo Scandal to Contract Specifications Mastering the Art of Trading

Sumitomo Copper scandal

The ‘Sumitomo Copper Scandal’ of 1995 is renowned in the commodities industry. Its impact sent tremors throughout the trading world, and it remains a prominent lesson in ‘rogue trading’ to this very day.

Sumitomo Corporation is a massive incorporated and listed Japanese conglomerate. The corporation largely deals in the general trading of goods and commodities. Initially, Sumitomo had a profound copper trading branch. This included purchasing copper from the spot market and warehousing it, along with big copper futures exposure to London Metals Exchange (LME). Yasuo Hamanaka was their star ‘Copper Trader’ – responsible for all things related to Copper.

So here is what happened –

o   Yasuo Hamanaka invested in spot market copper, amassing an impressive stockpile in warehouses.

o   He acquired copper not only in Japan, but also across the globe, storing it in a variety of locations/ports.

o   Essentially, he was long copper in the spot market.

o   At the time, he held around 5% of the global copper supply in the spot market – an unprecedented amount; enough to influence prices. He was, in effect, able to wield considerable power over the copper market.

o   He simultaneously invested in Copper Futures on the London Metal Exchange.

o   Traders were aware of Yasuo Hamanaka’s bullish stance on copper, however, the degree of his involvement could not be calculated since open interest data was unavailable at the time.

o   Whenever traders or trading firms sold copper short, Hamanaka took advantage of Sumitomo’s cash-rich status to purchase it.

o   Since he purchased in quantity, copper prices rose.

o   One must recall that copper is a global trade commodity, the cost being determined by the market (LME futures).

o   So LME prices went up – short traders were squeezed, Hamanaka made profits on futures.

o   In the end, those who had taken a short stance on copper would fail to meet their obligations, needing to provide it upon expiry.

o   Invariably these traders would end up buying copper from Sumitomo at a premium, which meant Sumitomo minted crisp profits on their spot position as well.

o   The profits snowballed, and Yasuo Hamanaka became the undisputed king of copper.

This set up worked well for over a decade, however the early 90s saw an increase in Chinese copper production. This excessive supply drove down prices and Yasuo Hamanaka was feeling the strain. His exposure was immense, making it hard to offload his contracts, so he borrow funds to sustain his leveraging positions. Unfortunately, this could lead to serious losses if there was even a slight move against him.

Yasuo Hamanaka’s copper empire was reduced to rubble when copper prices plummeted. The catastrophic fall of the Sumitomo Corporation, with estimated losses of a staggering $5 billion in 1995, are attributed to this crash.

Following, then were the expected allegations, legal action, rebuttals, and ensuing turmoil. The most vital point to be taken away from this saga is the relevance of risk management; we will discuss it further in another module.

Anyway, that was that; let’s move ahead to copper basics.