Tag Archives: financial crisis

A World of Chinese Boxes

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“Total use for greater wealth.” That was the triumphant banner under which the newly formed Bureau of Reclamation would parcel out and industrialize the water resources of the western United States at the beginning of the twentieth century. Now, as we are forced to appreciate just how scarce and precious freshwater and other resources really are, and as industrial civilization itself verges on collapse, it reads more like a fool’s epitaph.

We are, of course, still in the grip of the old industrial-era logic. I see it clearly in the arguments advanced in support of Lake Superior mining. When not pushing the jobs argument — or when an economist like Thomas Power calls their bluff — mining industry proponents and apologists regularly appeal to the utility (and the necessity) of mining around Lake Superior.

“These minerals,” one Michigan labor leader explained to me, “are gonna be extracted at some time. They have to be,” he continued, because they are “important for a lot of uses.” An imperative, mining carries certain duties with it: “The world needs the minerals” of the UP, he went on to explain, “and I think we have a responsibility to develop it right, extract it right, and share it.”

At least he acknowledges that the ore extracted from Lake Superior mining operations is destined for international markets. On the Public Television show Almanac a couple of months ago, at the start of the comment period on the Polymet EIS, Executive Director of Mining Minnesota Frank Ongaro asked us to pretend that mining Minnesota “copper, nickel, platinum” would somehow make us less “import-dependent” on those metals “for everything we use, every day in our life.” That was pure jingoism, and these arguments are misleading.

Just consider the news lately around the falling price of copper, which hit an eight-month low last week. The biggest story by far has to do less with slowing Chinese demand for manufacturing and building, and more with the “use” to which copper imports are now put by Chinese players in the commodities market. According to a Reuters story focusing on these “secretive” Chinese funds, “traders estimate more than half of copper imports into China were to raise funds using the metal as collateral over the past two years.” In a tweet that Aaron Klemz shared with me, CNBC’s Deirdre Wang Morris said it was more like sixty to eighty percent of all Chinese copper imports that were being “used as loan collateral.”

A March 13 Reuters article on the last week’s sell-off of copper by Polly Yam, Fayen Wong and Melanie Burton quotes “traders who structure financing deals” saying that “the selling of copper was due to speculators not breaches of financing deals. ‘Speculators are the main driver.'” I suppose that’s meant to be reassuring.

In a typical copper financing deal, an importer puts down nearly the full value of the copper in yuan as a deposit to a bank for a letter of credit.
The importer resells the copper into the domestic market to raise cash that can be used for other investments such as real estate.
The importer can also strike a hedged deal where the metal is stored in a bonded [or LME] warehouse in China or overseas in return for a loan from a foreign bank. In both cases, the importers no longer are exposed to the copper price.

And in all cases, copper — mined everywhere at great risk to water, watersheds, wetlands and the surrounding environment — is not being put to anything like the productive uses that most people imagine, or mining companies promote. From this angle, Polymet looks like Glencore’s bid to bring Minnesota into a Chinese collateral game. Things get even weirder when you consider the case of Eagle Mine in Michigan, where Lundin Mining has secured a $600 million credit facility to mine Lake Superior copper that will ship to LME warehouses owned by big commodity players and banks, and then serve as an object of financial speculation or as collateral in return for loans. It’s a world of Chinese nested boxes: credit swaps and derivatives will be spun around loans to mine copper to back loans in a huge urbanization scheme designed to move the Chinese toward a consumer society — and so on. It’s an unsustainable scheme, and after last week some analysts believe it’s already unraveling.

Orwell wrote in the industrial era about the critical role of mining in the “metabolism” of civilization. Now, in our post-industrial world, it appears that new mining will only hasten the cancer of financialization.

Update, 19 March 2014: For more on this theme, see Tyler Durden’s discussion of copper and “hot money” flows into China, here and here. 

Hazards of the Copper Antimarket

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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.”