Hamanaka cornered by betting against the market

By the time Sumitomo Corporation was forced to admit the scale of its huge losses at the hands of Yasuo Hamanaka, most back-street scrap metal merchants already knew who he was and what he was up to.

Their trade magazines had long been writing about the activities of "Mr Five Per Cent", the man able to determine the helter-skelter prices of the used copper pipes and boilers they dealt in since at least 1993.

The attention of the London Metal Exchange, the premier world metals market, had been drawn three years ago to a significant squeeze taking place in the availability of copper.

In essence, the cash price of copper - available at two days' notice - was higher than three-month futures contracts for the same metal, a process known as "backwarding".

This is seen as unusual because the futures price takes into account the additional cost of warehousing, insurance and the use to which the money employed to buy copper might be put instead.

The conclusion reached by many brokers, including some who reportedly complained to the LME, was that Mr Hamanaka was involved in cornering the market for copper.

Sumitomo, a significant end-user of copper, has an interest in controlling its price, both to obtain the metal cheaply and to ensure that its future supply is obtained at stable prices. Mr Hanamaka's job was to deliver this supply to his employers and, where possible, to make any additional profits for the company from his dealing.

The rationale used by Mr Hanamaka in 1993, which ran contrary to market expectations, was that supply of copper would lag behind demand for it in the short term and over a period of years. Although he denied rigging the market, some dealers suspected his comments indirectly explained the logic of Sumitomo's activities.

It is likely that over the past three years, not all of Mr Hanamaka's deals turned sour on him. In 1994, copper prices rose to about pounds 2,000 a tonne.

But by the beginning of this year, his insistence that demand would outstrip supply, thereby driving up prices, led him to engage in deals in which he repeatedly aimed to make a profit from a rise he was hoping to engineer. As the graph shows, backwardation rose between March and May, reaching a peak earlier this month.

By contrast, a number of US hedge funds, including one headed by George Soros and the Tudor Fund, bet against him that the market would fall.