The Wall Street Journal | December 7, 2010
By Carolyn Cui and Dan Fitzpatrick

J.P. Morgan Chase & Co. has emerged as the mystery buyer of more than $1 billion of copper, accounting for more than 50% of all the metal stored in official London warehouses and stoking worries about an impending supply shortage.

The New York bank's purchases have caused a stir in commodities circles in recent weeks. The London Metal Exchange late last month revealed a buyer had snapped up a large chunk of the exchange's copper stockpiles, leaving some to question whether a trader was trying to corner the market for the metal.

J.P. Morgan's appearance as the owner of the copper alleviated some of those worries.

The bank bought the copper mostly on behalf of clients, according to a person familiar with the matter, so it doesn't directly own all the metal. But the buying spree does leave a large swathe of copper in the hands of one bank and its clients.

"That percentage of total LME inventories is enough to get people's attention. They certainly do sort of have a lock on the market there," said Louis Zawislak, president of Commodity Management Solutions Ltd., a metals-consulting company.

Big positions aren't uncommon. Last week, the LME reported that single traders also held the majority of aluminum alloy and nickel, showing how commodities are increasingly dominated by a few players.

But while only a small piece of annual copper supplies, which will be about 19 million metric tons in 2010, J.P. Morgan's purchases are meaningful. The LME, considered the hub of base-metals trading, says it warehouses hold about 350,000 tons of copper, down from 555,000 in February.

The LME last week said the buyer had bought between 50% and 80% of the exchange's copper. A person familiar with the matter said J.P. Morgan's holdings are toward the low end of that range, indicating it owns more than 175,000 tons.

J.P. Morgan's purchases were reported by London's Daily Telegraph newspaper.

Copper is used in everything from electrical wires to pipes and air conditioners and demand for the metal is expected to shoot higher as the global economy recovers.

World-wide copper demand is likely to outpace supply by 497,500 metric tons next year, according to Casimir Capital, a hedge fund specializing in natural resources.

"The tightness of the copper market is revealed by the fact that one participant can assemble over half of the available copper stocks," said Justin Lennon, base metals analyst at Mitsui Bussan Commodities in New York. "This says that there's not a lot of spare metal out there, that's for darn sure."

Copper for three-month delivery on the LME has jumped 7.2% to $8,729.5 a metric ton since Nov. 23, when the mystery buying came to light. New York copper is up 8.1%.

Copper prices have also moved into what is known as "backwardation," meaning it is more expensive to buy copper for immediate delivery than for delivery in a few months' time. That is the opposite of the market's usual pricing and suggests that some are worried about a short-term supply squeeze.

As well as being alert to an improving economic picture, traders have also been bracing for the start of three exchange-traded funds that will be backed by copper. Those ETFs are likely to open up the copper market to new investors, many of them smaller investors, potentially fueling a big rise in demand.

J.P. Morgan is among those starting a copper ETF, which is set to launch next year.

J.P. Morgan's copper moves illustrate how the bank has emerged as a major player in world commodities markets after spending more than $2 billion on a series of acquisitions. Under the leadership of executive Blythe Masters, the commodities unit expanded to 1,800 employees, de-emphasized risky proprietary trading and boosted its reliance on client revenue. But performance has fallen short of expectations this year amid trading stumbles.

The $1.7 billion purchase of RBS Sempra Commodities in July gave J.P. Morgan a big trading platform, a host of LME warehouses, and a seat in the LME's coveted trading ring.

J.P. Morgan is one of the LME's 12 so-called category one ring dealers. That means the bank can make markets in the metal and hold it on behalf of its clients.

"As one of the leading firms in base metals and as a Category 1 ring dealing member of the LME, we are expected to make markets for our clients," a J.P. Morgan spokeswoman said on Monday.

It also gives J.P. Morgan's traders a seat inside the LME's ring of red leather couches during open-outcry trading—a session held for 15 minutes four times a day that allows key trading firms to negotiate trades face to face, rather than through electronic trading.

The LME has certain rules to discourage anyone from holding a dominant position, including forcing the trader to lend the copper to the market and limiting the fees the trader can charge. As long as there is a smooth supply of the metal, the exchange won't ask the trader to reduce the holdings.

—Tatyana Shumsky contributed to this article.