By Shihoko Goto – Exclusive to Copper Investing News

Speculation that Barclays Capital (LSE:BARC) ousted two of its top metals traders late last month as the investment bank posted millions of dollars in losses on the London Metal Exchange has reverberated across the commodities market, but for many traders, the news was hardly surprising. Granted, the London-based investment banking arm of the Barclays group has so far not confirmed the reports, but in light of Barclays’ purported losses in the copper as well as aluminum and nickel markets, the alleged ousting of Iain Macrae and Christian Saunders is in line with expectations. The question remains, though, whether such risky trading can and should be prevented in the future.

Barclays Capital’s trading desk has been one of the biggest money makers on the copper market, but as Europe continues to struggle to find its feet and China’s economic engine showing signs of slowdown, its bet on a continued rise in copper’s recent surge backfired in 2011. Specifically, Barclays lost against hedge fund Red Kite which expected the price of the red metal to fall as Macrae went long in copper during the summer months on expectations that warehouse stocks would fall, according to Reuters.  In July, the bank had published a report expecting the price of copper to rise to $12,000 a tonne in the fourth quarter from $9,137 in the second quarter. The fourth quarter average actually ended up being around $7,530.

The danger for the general public is that such risky moves by a retail bank may require government intervention to protect bank account holders, and the British government announced plans in early December to require banks to separate their retail banking operations from their investment banking operations in an effort to protect the public from risky internal trading losses. A legislative proposal is expected by the first half of this year and could be enacted by 2015.

It is, however, highly unlikely that the 2011 base metals trades put Barclays’ financial health at stake. Barclays spokeswoman Aurelie Leonard stated in an email that “the reports of big losses are nonsense,” adding that “there has been no abnormal trading in the commodities business.” While Barclays’ losses may be significant, it is unlikely to require any government intervention. The bank was clearly not involved in any illegal trading or any other activity that would require a regulatory investigation, and the bank is expected to continue operating its base metals trading desk at current levels regardless of any personnel change.

Indeed, Mediobanca analyst Christopher Wheeler reported that Barclays would have to disclose losses to the LME for amounts over $500 million, adding that such a large sum was unlikely given the trade volumes on the market making it difficult to make such a large one-off loss.

Global traders lose on copper positions

Still, massive losses on the commodities market and rogue traders are hardly new among copper traders. To date, the most spectacular loss came from Sumitomo Corporation’s trader Yasuo Hamanaka, who came to be known as “Mr. Copper” for losing the trading house $2.6 billion. Before his arrest for forgery and fraud in 1996, Hamanaka had earned the nickname “Mr. Five Percent,” which referred to the percentage of the red metal market many of his peers believed he controlled.

The following year, Merrill Lynch had to pay Codelco $25 million to settle a dispute regarding trades by former Codelco employee Juan Pablo Davila which cost the Chilean group about $170 million. As Codelco’s lead brokerage, Merrill Lynch had allowed Davila to make unauthorized trades.

Then there is the State Reserves Bureau of China’s copper scandal, where a single trader, Liu Qibing, lost about $200 million on the LME in 2005 which led copper to hit a then-record high of $4,160 a ton. As China’s main metals trader with the bureau, which is part of the National Development and Reform Commission, Liu Qibing had taken a number of short positions in copper on expectation of copper prices falling, which actually rose instead. China eventually had to auction large amounts of copper to push prices down, and in 2008, the trader was put on trial for illicit financial activities.

So while Barclays may have weathered its latest commodities trading debacle, the power of individuals in manipulating markets is clear, which may give more opportunities as well as challenges to smaller-sized mining companies.

I,  Shihoko Goto, have no interests in the companies mentioned in this article.