Why One Firm Would Buy Over Half the LME’s Copper Stocks

It’s unclear why a single buyer is holding such a large amount of the copper stocks in London Metal Exchange (LME) warehouses, but that statistic has certainly caught the attention of investors and analysts. On Monday, Reuters reported that LME data shows one entity holding 50 to 80 percent of LME copper.

That’s about $535 to $850 million worth of copper at current prices, certainly nothing to shake a stick at. What’s more, the buyer held even more than that — up to 90 percent of LME copper stocks — at several points in September.

According to The Wall Street Journal, that buyer is likely Red Kite Group, a London-based hedge fund manager. Though Red Kite declined to comment and the LME does not publicly identify the owners of metals, the Journal spoke with eight traders and brokers from different firms, and all believe that Red Kite is the single buyer behind the massive holdings.

Overall, the situation is fairly uncommon — though banks sometimes hold large amounts of LME metals for clients, it’s unusual for a hedge fund to do so.

Why would Red Kite be buying?

That’s the question on everyone’s mind. Of course, one possibility is that Red Kite is betting on copper prices going up, and wants to hold a good amount of the red metal in case of tightening supply.

Speaking about Red Kite, Stefan Ioannou of Haywood Securities noted, “they’re a firm that tries to position themselves strategically with regards to the metals.” The analyst added that if it is Red Kite buying, the firm likely has “a strong view on copper” and is probably making a direct investment in the metal.

Another possibility is that securing a large LME copper holding could drive up prices in itself. As the Journal notes, LME stocks are used as an emergency source of supply, and having a monopoly over them could allow one to charge higher prices. The exchange does not limit how much metal may be held by a single buyer.

Ioannou agrees that the large holding “may create a bit of a short-term crunch” for those used to buying spot copper from the LME, and said that if one entity holds over 50 percent of copper stocks, it could “dictate [prices] to a certain extent.” However, the analyst also stressed that there are LME regulations that prevent individuals from squeezing the market.

A drop in the bucket

Still, in the grand scheme of things, the amount of copper that Red Kite (or whoever else it may be) actually holds is not the be all and end all of the copper market. Ioannou said, “keep in mind, the LME these days is just one small- to modest-sized piece of the overall copper stockpile pie.” He estimates that holdings there amount to just 10 to 15 percent of global stockpiles.

Making the number even smaller, Matt Levine said that the amount is just “one-quarter of one percent” of the copper that Freeport-McMoRan Copper & Gold (NYSE:FCX) has, although that’s mostly in the ground. He states in a Bloomberg View article that the percentage of copper held in LME warehouses is “an arbitrary quantity that sounds more important than it is,” and cautions investors against confusing LME numbers with the actual commodity market.

The takeaway is that the LME buyer hasn’t cornered the copper market as a whole. However, Ryan Littlestone of Forex Live has suggested that if the holding is indicative of a positive copper price prediction by Red Kite, that’s worth taking note of, given those involved in the firm. To be sure, the large holding is unusual, and copper investors would be wise to keep an eye on ownership levels.

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.