Hazards of the Copper Antimarket

A couple of weeks ago, I wrote a post connecting Chinese urbanization with the new mining around Lake Superior. Chinese demand for copper — which is used in everything from large scale infrastructure projects to new housing construction — is likely what brought Rio Tinto to the Upper Peninsula in the first place. But the copper extracted by Rio’s successor Lundin Mining, which took ownership of the controversial Kennecott/Eagle Mine in Michigan’s Upper Peninsula just last week, or Polymet, which is developing a mine in Minnesota near the Boundary Waters Canoe Area Wilderness, won’t be shipped directly from the US to China. Instead, it will travel a long and circuitous route from Lake Superior through a tightly-controlled system of warehouses, and now the copper those warehouses hold will be the property of big financial firms.

This new arrangement — copper’s new holding pattern — entails new risks for the global financial system, the American economy and the places where copper is mined.

A story in the Times this past weekend reported that Goldman Sachs, Morgan Stanley and other big Wall Street players are already manipulating the market for aluminum, and developing Bank Holding Companies that will mix finance with global commerce in new ways. By hoarding aluminum and exploiting the rules of the London Metals Exchange — which the banks owned until just last year, when the LME was sold to a group of Hong Kong investors — Goldman and other banks are set to make billions of dollars without actually moving aluminum into the market. Copper, as the story noted, is “next up.”

Last winter, the SEC approved two new copper-backed Exchange Traded Funds, one from JPMorgan, which was the first of its kind, and a second from BlackRock. These new Copper ETFs not only permit but require JPMorgan and BlackRock to take possession of and physically store tons of copper in warehouses. It’s an audacious plan that will “ultimately allow JP Morgan, Goldman Sachs and BlackRock to buy 80 percent of the copper available on the market on behalf of investors and hold it in their warehouses.” A few firms will essentially control the world copper market — or to establish what rightly deserves to be called an antimarket. (The term is historian Fernand Braudel’s, and has been popularized by Manuel DeLanda).

Big copper consumers like Southwire and Encore registered their dissent, but SEC officials capitulated after heavy lobbying by too-big-to-fail finance. The SEC even said it shared the view put forward by the banks, that the new funds would “track the price of copper, not propel it, and concurred with the firms’ contention — disputed by some economists — that reducing the amount of copper on the market would not drive up prices.” Robert B. Bernstein, an attorney representing the copper consumers, suggested in a letter to the SEC last year that this took too narrow a view, and that copper prices were not the only thing to worry about. Bernstein argued that the investment houses’ hoarding of copper will disrupt the copper market, impede economic recovery, and work “contrary to the public interest.”

The public interest had some defenders at yesterday’s Senate Banking Committee hearing on Financial Holding Companies, where ETFs and the banking practices behind them came under scrutiny. Chaired by Senator Sherrod Brown and featuring expert testimony from Saule Omarova, Joshua Rosner, Timothy Weiner and Randall Guynn, the hearing touched several times on how the control of metals markets by financial players like Goldman and JPMorgan will affect the American consumer and greatly heighten the risk of another financial crisis like the one in 2008 — and necessitate another bailout by American taxpayers of firms that are too big to fail (but seem, oddly, hellbent on failure).

At the hearing’s end, Sherrod Brown said we need “to ask ourselves what it does to the rest of our society when wealth and resources are diverted into finance.” It was a good summary comment, because the hearing raised a whole host of questions about the social hazards this diversion entails.

For instance, what effect will these ETFs and financial manipulation of the global copper market have on the communities where copper is mined? Yesterday’s hearing didn’t directly address the point. Randall Guynn tried to suggest that a bank-controlled mine in a bank-controlled market where the bank warehoused and manipulated the price of the metal being mined would create a reliable and steady labor market. But others warned that the speculative bubble will inevitably burst, and that will leave both investors and communities in the lurch. Even while the boom lasts, workers and communities are likely to be powerless against giant commodity-extracting, -holding and -trading financial conglomerates with lobbying power, friends in high places and apologists like Randall Guynn.

Will the cornering and squeezing of the copper market by big finance exert new pressures to relax environmental controls? Why not, especially since multinational miners already complain about the delays caused by prudent environmental assessments? Both Omarova and Rosner asked us to imagine a scenario in which the Deepwater Horizon catastrophe happened on an oil rig owned by JPMorgan; now, with banks moving aggressively into copper, a mining catastrophe like the Bingham Canyon collapse (which I wrote about here) could send shockwaves throughout the entire financial system. “If we saw a catastrophic event at non-financial facility,” Joshua Rosner told the Committee, “the impact to the [financial] institution and the Fed would be catastrophic.”

Omarova stressed the complexities of these commodity markets, and expressed serious doubts that regulators “can oversee risks caused by Bank Holding Companies and this mixture of commerce and banking.” Rosner echoed these concerns: “to suggest regulators have ability to manage holding companies is to ignore all the areas regulators failed to oversee in 2008,” he said. Worse, the banks themselves would be incapable of predicting, controlling or even appreciating the risks to which they are exposed.

I made a similar point about JPMorgan’s inability to manage its exposure to human rights risks in the wake of the London Whale episode.

The new mix of banking, speculation and holding of commodities, said Saule Omarova, may make another London Whale more likely, and worse. So history may be about to repeat itself. Omarova went on to suggest that in making their moves into the commodities markets, Goldman, JPMorgan and the other firms playing this dangerous new game seem to have adopted a business model pioneered just a little over a decade ago, by Enron. That observation prompted Senator Elizabeth Warren’s dark comment: “This movie does not end well.”

5 thoughts on “Hazards of the Copper Antimarket

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  4. Interested reader

    This may very well not be quite the right spot to post the link I am going to share. I came upon your blog some time ago because I care about the Iron Range of Minnesota. I also thought mining around Lake Superior was in the past. Your blog, which I became aware of because of your beautiful film, touches on the tight in MN to stop mining.

    A best friend in college in WI’s father was a mining professor at MI Tech in the UP, so I have visited the UP. It used to be considered fun to drive from our college up through the UP and then to Canada to get to NYC instead of taking duller routs through OH, PA, etc. And we always had a place to crash in the UP.

    When I read a post or two of yours that discussed being in MN and showed some concern for renewed mining in what MN used to call the Iron Range, although now some foreign was after copper, I think, I asked some MN friends — I spent about 25 years living in MN and return there most years for a visit — what they thought about the mine. Everyone said, and many of my MN friends are, or were, professional journalists, that nobody they knew wanted the mining but the Iron Range is starved for jobs and people are voting, in their minds, for jobs, not for environmental destruction.

    I am rambling a bit. You seem to write so carefully. Sorry if my slapdash offends.

    Anyway, I just read some almost good news about Polymet. I will post the link and let you decide if it has value to your intermittent interest in mining around Lake Superior. As you seem aware, it’s not just the UP at risk. And it is not just the ground where profit seeks to mine: Lake Superior is a major source of clean water that is put at risk with mining, not very different from tar sands oil mining or fossil fuel fracking. We are destoying our ability to thrive on our commons and ‘we’ let it happen.

    The gist of the link below: Polymet is in trouble with its MN mining dreams and it has borrowed, at 19% interest, 11,000,000 to pay for a study that Polymet hopes will demonstrate the mining should be allowed. The 19% interest suggests desperation, which I hope means Polymet’s MN agenda will fail. Fingers crossed.

    http://www.timberjay.com/stories/Signs-point-to-uncertain-future-for-PolyMets-plans,12504

    Iron Range, UP: it’s all our world and part of the world abutting some of our largest reservoirs of safe water.

    Reply
    1. lvgaldieri Post author

      Thanks so much for the thoughtful comment and for the very smart and insightful Timberjay piece. It’s so interesting to me how the current mining activity intersects (and often conflicts) with people’s memories and ideas about what the Lake Superior region should be — or could be. I wonder, where did you see 1913 Massacre?

      Reply

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