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03 April 2019

Listen to what they say.......



Last week I wrote about some phrases that chill the soul; this week, I thought, on a lighter note, I’d mention some that should - but didn’t always - have set off alarm bells in the mind of a metal trader.

Back in the late 1980s/early 1990s, there was, as many will recall, a copper trader who became very well-known - eventually even outside the world of metal trading - and dominated the copper market for some years. Like everybody else in the business, we thought at the time we should get a piece of the action. So, lots of  telephone conversations, a couple of meetings with a sidekick and eventually, together with one of my colleagues, I was invited to invite the Great Man to lunch. 

He chose the restaurant (Chinese, just off the Ginza), he chose the menu, and all went swimmingly well. “Your company may be a small one”, he said, “but we know it has a good reputation. Certainly, we can do business together.” Great, we thought, as the conversation broadened. Towards the end of the meal, we talked again of the copper market, his influence and his position within his own organisation. 

And that’s when he made a statement that should have made us think again… “You see,” he said, “I’m different from every other Japanese metal trader you may meet. My bosses cannot move me from my job. Apart from me, nobody in the company knows what our copper position is.”  Mmmm…..we all know how that story finished.

Then, a few years later, there was another Japanese copper trader, at a different company, who suddenly burst onto the scene. Much younger than the other one, he started to sell copper options like there was no tomorrow. Our Tokyo staff insisted that I should go and visit him, so I could have more ammunition to ask the credit department for a bigger line. So, another flight to the Far East, another lunch in Tokyo. This time, the trader was accompanied by several of his colleagues, including somebody very senior in the company whom I had known for years. I was introduced to the man by my Tokyo colleague, and, as he handed me his card and pronounced his name to me, he added, “You can think of me as the new Hamanaka.” Well, again, warning signal, or what? This one didn’t last very long, before he blew up the copper book and indeed caused severe difficulties to the whole company. Still, we bought reams of copper options from him in a period of high volatility, so overall for us it worked - albeit not for very long.

My third example of an outrageous statement comes from a European. This man ran a major smelter. We had a very close relationship with them, and although I was mostly peripheral to the business in this case, I got to know him reasonably well. It was at a conference in - I seem to recall - Chicago when one of my senior colleagues and I had dinner with him. He was always entertaining company - erudite, amusing, but possibly also a tad arrogant. Talking about the market, he told us: “It doesn’t matter to me if the market goes up or down - I make money both ways.” He went on to explain that, as he had raw material inputs as well as refined metal outputs, he could assign LME positions to either the raw material book or the metal book; and thus, since low prices suited one and high the other, he could make money both ways. Mmmm….well, what he was actually saying was that in a rising market I look at my longs and say how well I’ve done (and ignore the shorts) and in a falling market the precise opposite. But it never works like that, and, sure enough, that company also dissolved into big losses, and our friend left the stage without any applause.

And the moral of these tales? Well, I suppose it’s that when you come across those who think they are bigger than the market, and if they give you clues like these in advance, maybe the best thing is to walk away. Although, I should add that we didn’t walk away in any of those instances; overall, we made money out of them - obviously, the gods were smiling on us………  

 


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