Before I deal with my principal subject for this week the supposed infinite demand for metals, thanks to growth in China let me assure all the people who wrote asking for more detail on the real economics of shale gas that I will be returning to the topic soon.

My goal is to find out how big companies manage to bleed large amounts of cash, year after year, in this part of the energy business, and yet still appear to be highly attractive to investors. I know I'm missing something.

Back in November, I wrote about how the more-than-doubling of the copper price over the course of the year was creating a mania. There were even reports of Chinese households stocking up on copper soup tureens as an "investment" vehicle. As manias do, it went on for longer than seemed possible. The copper price paused to catch its metaphorical breath in late January. Then it powered back towards the year's highs after the Greek panic dissipated last month.

This gives us the chance for an art lesson, that is to say the art of "painting the tape".

Before we had enough regulators to prevent the manipulation of equities or commodities prices, cynical speculators would put in smallish buy or sell orders at carefully chosen moments of illiquidity in asset markets, then reported on printed paper tape. These orders, or daubs of paint, would create the impression of greater buying or selling interest on the part of the investing public than was in fact the case.

These people, no longer with us thanks to the efforts of the Securities and Exchange Commission, the Commodity Futures Trading Commission, and the UK's Financial Services Authority, would also manipulate industry data to mislead the public about the prospects for a given company or industry. Then they would sell their own long or short positions to the deceived retail or institutional investors.

For the past couple of months something that looks awfully like that process has been present in the copper market. It's all about the story. The collective mind of any market seems to have a hard time grasping more than one idea at a time, and for copper, or other risk trades, that idea has been Chinese demand for everything, for ever, at rising prices.


Of course if you work as an investment manager for a responsible institution that buys — sorry, invests in commodities, you need to document your one idea with some "metrics". That way, when the position goes bad, you can prove everyone else would have been thinking the same thing, so you shouldn't be fired.

In the copper market, one of those metrics is the rate at which warrants, or ownership rights, to physical copper in certified warehouses, are being cancelled. The cancellation of a warrant means that the copper is no longer available to back the purchase and sale of exchange traded futures or forward contracts. The presumption is that the copper represented by the cancelled warrant will be shipped out of the warehouse to an end customer, who will turn it into air conditioner coils or cartridge cases.

Then a commodities dealer will call his "real money" clients and tell them about the increase in demand.

See, if you had a lot of copper on hand, and wanted to get rid of it, you might cancel the odd warrant and point to the "demand increase". You wouldn't have to actually take the copper out of the warehouse; you'd just tell clerks at the exchanges it wasn't available for sale on the public market. Private buyers could still have it, though, at a price set in the public markets.

Chinese demand for copper, real estate, or other assets depends at the margin on the availability of credit. The increases in credit are being reduced by well-publicised state policy. Copper has become a way to bet against that policy. Bad idea.

There is a price decline coming soon, whether or not there is a long-term bull market. Some people will make sure they sell before that happens. They care about profits, not documenting why everyone else was making the same mistake.

--Financial Times