Opinion ID: 2995956
Heading Depth: 2
Heading Rank: 2

Heading: The Copper Market

Text: Despite the fact that copper is sold in a variety of physical forms, the summary judgment record (viewed in the light most favorable to the plaintiffs) indicates that the pricing of copper is consistent throughout the industry. Like many other commodities, copper is traded on commodities exchanges through warrants and futures contracts. Most copper futures are traded on either the London Metals Exchange (LME) or the Commodities Exchange Divi- sion of the New York Mercantile Exchange (known familiarly as the “Comex”). When futures contracts mature, they must either be closed out by an offsetting trade or satisfied by deliveries of the underlying physical goods. If a futures trader is short, she must satisfy her obligation under the futures contract by immediately delivering physical copper cathode to an LME or Comex warehouse; if a trader is long, she may similarly call in physical copper cathode from a warehouse. Because of this, the price of physical copper, including cathode, rod, and scrap copper, is directly linked to the LME and Comex price for copper futures, and dealers in all forms of physical copper quote prices based on rigid formulas related to copper cathode futures. 6 Nos. 00-3979, 01-1148, 01-3229, 01-3230, 01-3485 While sales between six plaintiffs and numerous other copper industry participants are involved, we will illustrate this linkage by discussing only the relationship between one of the plaintiffs, Viacom, and the largest integrated producer, Asarco. Viacom entered into yearly supply contracts with Asarco, copies of which are included in the record. In these contracts, the price Viacom paid Asarco for cathode was made up of two components. First, the base price was set by “the arithmetic average of the COMEX first position settlements for high-grade copper during the calendar month of scheduled shipment.” From 1990 to 1996, this price fluctuated from about 75¢/lb to over $1.40/lb. Added to the base price was a “cathode premium” that was set on a monthly or quarterly basis. Asarco’s premium fluctuated over the relevant time period from 2.75¢/lb to 3.5¢/lb. The record also indicates that when the base price of copper increased, the premium tended to increase as well. Viacom bought over half a billion pounds of cathode from Asarco. Asarco manufactured most of this cathode, but some had been purchased for resale from other merchants to make up for production shortfalls. Because records of these purchases were not kept, it is impossible to tell whether any particular pound of cathode sold to Viacom was manufactured by Asarco or merely purchased for resale. The defendants concede, however, that some of the cathode in question was being sold into the market for the first time. While there is some dispute as to the exact numbers, taking the evidence in the light most favorable to Viacom, Asarco sold it 510 million pounds of cathode over the relevant period. During this same time frame, Asarco refined 6.4 billion pounds of cathode and purchased 153 million pounds from third parties. Therefore, even if one assumed that every scrap of Asarco’s previously sold cathode was shipped to Viacom (instead of to one of its many other customers), Viacom still purchased 357 million Nos. 00-3979, 01-1148, 01-3229, 01-3230, 01-3485 7 pounds of never-before-purchased cathode. Viacom seeks damages in this suit only for cathode that was sold to it for the first time by its integrated producers. Asarco also purchased raw materials, such as concentrate and anode, to supplement its own production and keep its smelters and refineries running at full capacity. At least 27 million pounds of the cathode Asarco shipped to Viacom consisted entirely of Asarco raw materials, but the rest may well contain some percentage of previously purchased materials. While raw materials are often priced in reference to Comex prices, only cathode is actually traded on the exchange. Raw material prices also incorporate significant and widely varying discounts based on both the cost of converting the materials into cathode and current refining and smelting capacity. Furthermore, the defendants’ experts testified that while the prices of raw materials “may be indirectly affected by the manipulations,” a squeeze or corner on cathode could not directly harm the purchasers of pre-cathode raw materials. The pricing of rod and scrap are similar except that each contains further premiums and discounts off the cathode futures price to reflect a variety of additional costs. Rod pricing contains an additional rod or shaping premium. Scrap copper prices are affected by not only the price of cathode but also freight costs, sizing, sorting, packaging, and purity requirements. Some of Viacom’s suppliers and customers engaged in strategic hedging by purchasing “put” options on the futures markets. A put option holder has the right, but not the obligation, to sell a futures contract at an established “strike” price. If the market price is higher than the strike price (because, for example, the price has been artificially raised), the holder’s option will expire and its only cost will be the price of the option. Asarco purchased put options to hedge its output, but it did not hedge 8 Nos. 00-3979, 01-1148, 01-3229, 01-3230, 01-3485 against specific transactions, by, for example, purchasing a futures contract for each sale made to Viacom. Its hedging activities were also limited to a fraction of its supply. One of Viacom’s suppliers, Kennecott, did not hedge at all, and Viacom itself never hedged its copper purchases.