Copper volatility leads to calls for regulation

In a public meeting held by the Commodity Futures Trading Commission (CFTC), Jeffery Burghardt, vice president of North American Metal Procurement and Global Utilities of Luvata Buffalo, spoke on behalf of the Copper and Brass Fabricators Council regarding the unprecedented volatility in prices for copper over the last several years. The CFTC set this public meeting to examine futures and options trading in the precious and base metals markets and focused on trading in gold, silver and copper.

In his remarks, Burghardt noted that the price of copper has risen by more than 100 percent since the end of 2008 even though the quantity of copper stored in warehouses also increased substantially over the same period. “By all rights,” Burghardt observed, “the greater supply of available copper should have led prices to decline rather than more than double. The Council believes that the explanation for this counterintuitive pricing lies in investment firms’ large positions in the markets. What the Council seeks is lower volatility and market prices that reflect over time the real demand/supply situation, not the excesses of speculation.”

In materials released prior to the public meeting and during the meeting itself, the CFTC questioned what would happen if it were to establish position limits for metals markets.

In response, Burghardt stated that the Council shares the goal of limiting the impact of investment funds in the commodity markets, but believes that position limits would be very challenging to implement effectively.

Instead, Burghardt said, “The Council submits that a better means to the end will be to raise the initial margins required for investment firms. The system for initial margins is already in place and in use, will allow for flexibility in changing the amount of the initial margins as circumstances warrant, and will be much easier to monitor and control than position limits.”

In expressing the Council’s appreciation and support for the CFTC’s willingness to tackle this issue, Burghardt stressed the importance of futures markets for the Council’s members in establishing prices and managing the price risks that copper and brass mills face. “We only use futures markets as necessary in our day-to-day business to hedge our price risk, and it is critical we can do this in a cost-effective manner.”